Friday, February 29, 2008

How to Lose Double Your Money on Rising Gold Prices with Gold ETNs

Deutsche Bank announced that it will issue three Gold Exchange Traded Notes (Gold ETNs), that will be traded on the NYSE Arca.

The New Gold ETNs are:

DB Gold Double Long ETN (NYSE Arca: DGP)
DB Gold Double Short ETN (NYSE Arca: DZZ)
DB Gold Short ETN (NYSE Arca: DGZ)

The ETNs provide +200%, -200% and -100% monthly returns respectively on gold future prices. The Gold ETNs also provide an additional return equivalent to investing cash in Treasuries which adds approximately 5% return to each Gold ETN, including the Short ETN.

There are two ways to lose money in a Gold Bull Market.

One is to get in the way of a generational gold bull market by going short. Going short is where one bets the gold price will go down.

The other way to lose money is to buy gold on margin and have your entire position wiped out with a margin call. These new Gold ETNs provide you with the opportunity to be wiped out both ways.

They also offer an even better way to lose your wealth in a gold bull market by allowing you to go short gold on margin. That is for every 1% that the gold price increases, you will lose 2% of your capital. When you consider that the gold price has increased over 30% in the last 6 months from around $650 to today's gold price of $970, if you had of owned the DB GOLD Double Short ETN during this time you would have lost 60% of your capital in just 6 months. The bonus 5% T-Bill rate on top of this staggering loss would hardly make up for it.

While the GOLD ETNs also give you the opportunity to go long gold, take careful note that the Gold ETNs are not backed by gold bullion. So you are not investing in gold when you buy the Long Gold ETNs, you are investing in a paper product which is not actual gold. The Gold ETNs merely track the price of gold futures, and you have no rights to any actual gold. There is a big difference between owning a paper product that tracks the price of gold and owning real physical gold coins or gold bars in your possession or gold bullion in secure storage.

Richard Russell the editor and publisher of Dow Theory Letters makes this important point about what gold is and why people buy gold, on his website on the 19th of February:

"Gold is the universal, time-honored standard of wealth. Gold is pure, tangible wealth, and since pure wealth cannot be bankrupted or destroyed, gold is totally 'safe.' Gold is so safe that it doesn't need to pay any interest to tempt people to hold it. Wise men and women don't hold gold for income any more than they hold a ten-carat D color diamond or a Picasso picture for income. They hold these items because they represent timeless wealth."

How To Profit From Rising Gold Prices
The wise way to buy gold is to buy physical gold bullion without margin that you own 100% in the form of gold coins or gold bars.

1 comment:

Mark Herpel said...

GoldMoney is great isn't it. Love them....I just saw on their web as of a few days ago they had over $337 Million in holdings for customers. and are really good ones too, that I like.

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