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Everywhere I turn I am hearing about investing in gold. It's to the point where I hear about it so much that it's a mania. That just seems to indicate to me that the best thing to do is to be a contrarian.

So my question is this: if gold prices collapse from historic highs, what benefits from the collapse?

Janie

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those currencies that are less backed up by gold like Dollar, Pound, Euro etc –  Asdfg Dec 29 '11 at 21:33
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@Asdfg - I'll bite- gold drops to $200 tomorrow. How exactly does this help the dollar? Aside of course, from the ability to buy more gold, what is the impact beyond this? –  JoeTaxpayer Dec 29 '11 at 22:01
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Bitcoin (sorry, I just had to) - bitcoin.stackexchange.com –  ripper234 Dec 29 '11 at 22:34
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@AsdfgAll curencies today are fiat currencies. There are no currencies backed by Gold. Swiss Franc [last currency partially backed by gold] was backed by 40% Gold that was discontined in 2002. –  Dheer Dec 30 '11 at 7:11
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@ripper234 - I voted you up (sorry, I just had to LOL) –  Jane WIlkie Dec 30 '11 at 14:07

4 Answers 4

up vote 12 down vote accepted

Ok, I think what you're really asking is "how can I benefit from a collapse in the price of gold?" :-)

And that's easy. (The hard part's making that kind of call with money on the line...)

The ETF GLD is entirely physical gold sitting in a bank vault. In New York, I believe. You could simply sell it short.

Alternatively, you could buy a put option on it. Even more risky, you could sell a (naked) call option on it. i.e. you receive the option premium up front, and if it expires worthless you keep the money. Of course, if gold goes up, you're on the hook. (Don't do this.)

(the "Don't do this" was added by Chris W. Rea. I agree that selling naked options is best avoided, but I'm not going to tell you what to do. What I should have done was make clear that your potential losses are unlimited when selling naked calls. For example, if you sold a single GLD naked call, and gold went to shoot to $1,000,000/oz, you'd be on the hook for around $10,000,000. An unrealistic example, perhaps, but one that's worth pondering to grasp the risk you'd be exposing yourself to with selling naked calls. -- Patches)

Alternative ETFs that work the same, holding physical gold, are IAU and SGOL. With those the gold is stored in London and Switzerland, respectively, if I remember right.

Gold peaked around $1900 and is now back down to the $1500s. So, is the run over, and it's all downhill from here? Or is it a simple retracement, gathering strength to push past $2000? I have no idea.

And I make no recommendations.

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You mentioned ETFs--there are also ETFs that short gold. To OP: these are also probably not for the casual investor. Some examples can be found here: etf.about.com/b/2009/12/23/short-gold-etfs-a-short-list.htm –  Phil Sandler Mar 3 '13 at 23:37

It's not clear that anything needs to go up if gold goes down. In a bubble, asset prices can just collapse, without some other asset increasing to compensate. Economies are not a zero-sum game. On the other hand, gold may fall when people decide they don't need to hoard some store of value that, to their minds, never changes. It could very well indicate that there is more confidence in the broader economy.

I am not a gold bug, so I don't much see the point in "investing" in something that is non-productive and also inedible, but to each his own.

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Nothing necessarily has to "benefit."

Right now, what primarily drives demand for gold is its perceived use as a hedge against the inflation of fiat currency. I.e. when inflation strikes, the price of gold goes up rapidly. Thus, for a given currency, gold decreasing in price is almost always a signal that the currency is increasing in value.

However, it may be that at some point in time people everywhere just decide that gold is no longer worth using as an inflation hedge, and thus the price collapses simply because demand collapsed. No corresponding "benefit".

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It seems that you're interested in an asset which you can hold that would go up when the gold price went down. It seems like a good place to start would be an index fund, which invests in the general stock market. When the gold market falls, this would mainly affect gold mining companies. These do not make up a sizable portion of any index fund, which is invested broadly in the market.

Unfortunately, in order to act on this, you would also have to believe that the stock market was a good investment.

To test this theory, I looked at an ETF index fund which tracks the S&P 500, and compared it to an ETF which invests in gold. I found that the daily price movements of the stock market were positively correlated with the price of gold. This result was statistically significant. The weekly price movements of the stock market were also correlated with the price of gold. This result was also statistically significant. When the holding period was stretched to one month, there was still a positive relationship between the stock market's price moves and the price of gold. This result was not statistically significant. When the holding period was stretched to one year, there was a negative relationship between the price changes in the stock market and the price of gold. This result was not statistically significant, either.

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