What is gold going to peak at?

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Woo, it looks like gold is finally crossing the price point at where I start making a profit. With a commodity with so much financial inertia, I guess I should expect it to take more than a day for the crash to resolve.

Hmmm... the price behavior of GLL (A stock that "double shorts" gold) seems to be inconsistent with the price of gold. For example, when gold was at some price and still declining, GLL jumped from 16.90 to 16.43 and then suddenly jumped back up to 16.87. Is GLL's stock price independent from the price of gold? (That is, do the buying and selling forces on GLL determine its stock price more than the actual price gold? Does it influence it at all?)

It looks like GLL is a leveraged 2x ETF.

I find leveraged ETFs confusing as hell and I'd love it if someone came in and cleared some things up.

Basically GLL hopes to achieve twice the inverse of the daily performance of gold.

I think the volatility that you're seeing is directly tied to the nature of leveraged ETFs--when they're trying to be 2x or 3x the market, they can shoot up and down quite a bit.

And I think the price of GLL is directly related to the price of gold [but again it gets more complicated as gold is more than just the price of gold bullion, it's futures and currencies as well (and more)].

This might be a better than me attempting to explain:

http://finance.yahoo.com/echarts?s=iau# ... =undefined

Hope that mess of a link works, if not, just go to yahoo finance, bring up a chart for GLL and then compare it to IAU [More-or-less gold bullion ETF; also play around with the time frame of the chart]. Anyway you should see that they are the complete opposite, and often GLL reacts twice as much as IAU--that's the leveraging.

There are going to be some short term buying and selling forces that impact the price of GLL, along with the cost of gold futures and all that, but generally speaking the price of gold is going to be the biggest influence on GLL. That might be too strong a statement. You may see some short term buying and selling influence the price of GLL.

Hope that answers your question. It might be good to do some research into leveraged ETFs; I'm skeptical of them, and they might not be good for a long-term position.

Thanks! I need to look at the underlying holdings of ETFs to get a good idea of how they work, exactly, (I heard buying one dollar of a leveraged ETF is matched with a dollar of debt? I don't understand how that works since who's going to hold the debt if the share goes down?) but I did see someone explain the nature of their longterm performance. Apparently, over time, the "ratio" converges to 1 although the ratio is 2 over the short term. That's because a percentage decrease is more mathematically 'significant' than a similar-magnitude percentage increase, and the decreases and increases compound over time resulting in a convergence to 1.

So, basically, your actual longterm leverage is somewhere between 1 and 2. If it's 1, it's basically just like going long or short on the underlying commodity, so the worst a leveraged ETF is going to perform over the longterm is like an ordinary stock purchase. Of course, you have to take into account "management fees" which subtract from the stock's value... I wonder how fat the wall-street fat-cats are getting off the "management fees". Hopefully it's not seriously affecting the return rates on the leveraged ETFs.

It seems gold has had a lot of volatility within the 1700-1800 band, but it seems to be staying within that price band. I'm going to guess that might gold's "fundamental price" (at the moment) and the speculative premium was only $200. I personally was expecting something like $400 considering the graph basically skyrocketed from $1600, which implies mostly speculative demand past that.

Considering the volatility, I'm not sure what that *means* and what implications that would have. Since I'm guessing volatility isn't exacerbated by people entering longterm positions (Because they'd likely hold the position, assuming the loss isn't too great.), I'm guessing it's mostly short-term frenzy feeders suggesting that many of the short-term speculators haven't completely exited the market. So, after a while, they might exit which would reduce volatility and overall demand would decrease, absent the affects of news or other market sentiments. Once the price reaches critical price points (like $1700), longer term investors might dislodge their position accelerating decline.

In evaluating the price consistency of leveraged ETFs, I gathered two data points.

When I bought and at 14:02 NY time.

When I bought, gold according to kitco.com was at 1821 and I purchased GLL for 16.11.

At 14:02 NY time, GLL was 16.11 and gold according to kitco was around 1805 or 1807.

If I were expecting a mere reduction in the magnitude of the gain resulting from compounding, then these two price points should be the same but... they aren't.

This supports that price behavior isn't consistent between a leveraged ETF and the underlying commodity. They really seem to be designed for the short term, and any long-term price behavior isn't merely a reduction in the gain, there's shifts in the price points. Whether this particular type of shift in this situation is advantageous or not is beyond me ATM. I suppose I could calculate it, though.

Gold is currently 1793 and GLL is 16.30. I bought GLL at 16.11 and gold was 1821. The ratio between GLL's movement and gold's movement (The 'gain') is (16.30-16.11 / 16.3)/(1821-1793 / 1821). = .011656 / .015376 = .758, which is far less than the "2x" it aims for. It's even less than the "1x" that shorting gold directly would've returned.

LOL. It looks like shorting gold directly would've been a more profitable long-term position. Thank god I didn't LOSE money in my naivete!

Hey swbluto:

Interesting analysis of GLL. My few thoughts:

1) Two data points is pretty limited for your conclusion
2) The price of gold that you see, the $1814.90 I'm seeing right now, might not be the best "cost of gold" figure to use. IAU or GLD, might be a better representation. However this critique really shouldn't change your analysis much! It's pedantic if anything!

Also, from my limited understanding of leveraged ETFs, on the short term, GLL does seem to have higher inverse returns of the price of gold. Bring up a short term comparative chart and you can see this. Long term this gets skewed [which from my research on leveraged ETFs seems to be the big criticism].

To play devil's advocate: GLL looks great for a short term play [but then I feel you're timing the market, and I try to avoid that]. Also, for me it's easier to buy shares of GLL than to short gold bullion.

Looks like you're still profitable on your position in GLL! Congrats and hopefully you covered commissions if you're looking to get out!

Good luck!

--David

Have you sold yet and taken your profit?

Price is back up again. The Chinese are diversifying out of dollars and buying the dips in gold as a long term strategy, it's not going to crash back to sub $1000 levels in the foreseeable future.

Be careful you don't lose your shirt shorting, hoping to time a crash that isn't going to happen...

I read the online news about the Chinese investing in gold and I didn't take into account their investments, so as soon as the market went back up around the price I bought at, I set up the "sell limit" so that I would make $10 and sure enough, market fluctuations got it to sell. So, I didn't lose my shirt on my first investment. Yippee!

Yeah, I don't know where the longterm price of gold is going to be at, honestly, since the supply can't change too quickly to accommodate significantly increased demand meaning the "price curve" is a bit steep (The supply curve is inelastic, so to say) and apparently demand ins increasing, so the price is probably going to change a lot in one direction or the other in the long term. So, playing the "gold" game is a bit risky right about now.

Does anyone know if there's a way to do a "long term spread" on gold? That is, if it increases over the long term, I make money, but if it decreases in the long term, I still make money? I know that you can do that with a "spread" in the short term (basically, a put and a call simultaneously), but I don't know if there's a way to do it for the long term.