If Dollar Rises, Gold Is a Goner

04/30/2007 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Successful Investing, thinks gold may be topping out for now and the dollar may be finding a short-term bottom—and he suggests two possible ways to play it.

All big runs eventually come to an end, and the run-up in gold and precious metals appears to have topped out. Right now, we are witnessing some stabilization in the decline of the US dollar and that has caused the momentum players who jumped into gold and gold-mining stocks to start heading for the exits. The reason for both the earlier inflow and the current outflow is that gold and other precious metals are a safe haven when the dollar is in decline.

And while I do think the fundamental factors operating in favor of further dollar declines are still very much present, the dollar won't go straight down forever. The dollar, as measured by the PowerShares DB US Dollar Index Bullish (AMEX: UUP), has risen since last week and has helped to push the price of gold stocks lower.

[Meanwhile], the Market Vectors Gold Miners (GDX) has now fallen below its 50-day moving average. This downturn in gold stocks is just the catalyst that I was looking to see before I recommended [taking] a short position in precious metals.

That's why I am recommending that you buy the ProFunds Short Precious Metals (SPPIX). SPPIX is a mutual fund that seeks daily investment results, before fees and expenses, which correspond to the inverse (opposite) of the daily performance of the Dow Jones Precious Metals Index.

The fund normally commits at least 80% of its assets to financial instruments with economic characteristics that, in combination, should move in the opposite direction of the precious metals index. We are using SPPIX rather than an ETF, since there are no ETF options available to short the precious metals sector. (Editor’s Note: Only risk-tolerant investors who can afford to lose money should engage in short selling.)

I expect to be in this fund for as long as the decline in gold and precious metals continues. That duration may be for only a short time. But given the volatile nature of precious metals, a short time is all we may need to capture big profits.

[Meanwhile], with the dollar in a downward spiral, it's time to start thinking about "bucking the trend" here—pun definitely intended.

The greenback is trading well below its 50- and 200-day moving averages, and I expect to see a pop here in the currency from these historically low levels. That’s why I want you to hold on to UUP, as this ETF will rise when the dollar rallies.

I don't believe that the gold bull market is over in the long term. Nor do I believe the decline in the dollar is over. But I do think that the current action in both the dollar and precious metals markets warrant a bucking of the long-term trends in an effort to capture short-term profits.

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