How to short gold?

Everyone is talking about it. It is like free money. How to do it?

Below is a seekingalpha post in 2010.

• Basic Approach: Short (GLD) – GLD is the most popular gold ETF with plenty of volume and a small bid/ask spread. By shorting shares, you’d benefit from a downside move. Note however that this opens you up to unlimited losses and if gold really spikes, this could be a dangerous trade.

• Basic Approach #2: Long PowerShares DB Gold Short ETN (DGZ) – DGZ would be a means to limit your losses by buying the inverse and benefitting from a decline. ETNs have some risks including issuer solvency risk and futures roll losses (see ETF 7 Deadly Sins for more on what to watch for). There is no inverse ETF though, so this may be your only choice for a loss-capped 1X approach.

• Buy Inverse ETF: Long (GLL) – This ETF seeks to replicate 2X the inverse return of gold daily. This would amplify both your gains and losses. Note however that leveeraged ETFs tend to lose value over time regardless of the underlying asset performance due to daily resets.

• Naked Calls: Sell Out of Money Calls on GLD – This is also a risky strategy, but a means to capture some option premium on a rolling basis if you believe gold won’t breach the strike price you choose. If GLD is at $134 and you sell a call for $140, as long as GLD doesn’t breach $140 by expiry, that option expires worthless and you keep the premium. It’s risky though, as your losses are unlimited should GLD exceed the strike.

• Naked Puts: Buy Out of Money Puts on GLD – This is an option to benefit from a drop in gold prices while limiting your loss. With GLD at $134, you can buy a put option at 130 strike, Dec expiry for around $3 premium (at a cost of $300 for the contract of 100 shares). Therefore, if GLD drops below $127 by expiry, it’s all profit from there and you’d have capped your loss at $300.

• Pairs Trade: A nifty trend to watch for is when the premium on the Sprott Physical Gold ETF (PHYS) gets ahead of historical norms and you can simultaneously short PHYS while going long GLD. See my recent gold pairs trade result, which was the best risk/return money I’ve made in a long time.