Double Long Gold ETF – Double The Risk, Double the Fun
With gold prices skyrocketing, many gold bugs are eyeing leveraged gold ETFs. A double long gold ETF is an exchange traded fund (ETF) that uses different strategies to exaggerate the change in the price of gold. Normally when one buys gold, say for example $1000 an oz, own it until its $1200, and finally they sell it for a $200 profit. That’s basic investing and they earned 20% on their money. These gold funds will use leverage to magnify the return:
Leverage Option 1: Margin
The fund may buy gold on a margin to increase the returns, similar to taking out a loan to buy a house. Say the fund buys gold for $1000, using $1000 cash and $4000 borrowed money for $5000 worth of bullion. Gold than rises to $1200 and they sell all they have for $6000. They just earned $1000, except they only invested $1000 of their own cash for a 100% return instead of 20% return in the cash value. A leveraged gold ETF will use this tactic to “double” the return on gold or double the loss.
Leverage Option 2: Contracts
There are various contracts in futures, options, or other derivatives that can inflate the return on gold, or lose it all. The most basic version of how this works is the fund will buy the right to buy gold at a price of $1100 when gold is at $1000 sometime in the next 6 months. Say this cost is $50 for the contract. When gold hits $1200 you could sell the contract for $100 dollars at the end of 6 months doubling your money, or again earning 5X the price of the gold movement.
The double gold ETF combines these strategies plus many more so the price of their fund will move twice the movement in gold in either direction. For the very aggressive investor, you can also find triple movements or plain leveraged funds. No matter which leveraged ETF fund you choose, by sure the manage your risk with sell stops and be sure to diversify your investment portfolio with other sector funds.
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