Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Add gold to diversify, ProShares UltraShort Gold ETF (NYSEMKT: GLL) that is. You might be shaking your head and thinking gold is a lock to go up because it is either a safe haven if we enter a recession or we print to save the world and gold skyrockets. So it is a win-win. That is what everyone is thinking, albeit incorrectly, and exactly why you should do the opposite. Going with the crowd is not always a bad idea, but when you combine it with technical analysis that shows gold breaking down, you have a big problem.
If you are super bullish on risk assets, then this trade is probably not for you. I personally think a recession is imminent based on a couple key factors. One is the European austerity, declining growth, more austerity, deflation depression spiral they are embarking on. Italy doesn’t have to blow up for there to be a grinding recession in the region. The second is the call by ECRI of a U.S. recession in the first half of 2012. It is important to find people you trust and these guys qualify. They predicted the 2008 recession, said that 2010 was NOT a recession, and are now pounding the table for a least a mild recession in the U.S. in 2012.
Putting it all together you have SPDR Gold Trust ETF (NYSEMKT: GLD) inflows at a record high, significant resistance lines broken on a crowded trade, weak global growth and contained inflation, and a rising dollar mostly as a result of Euro weakness. It all adds up to GLL being a winner into the first part of 2012.
Adding GLL to a mostly long portfolio will also provide some protection should a tail risk depression develop in 2012. I should note that you don’t want to hold 2x ETF's for too long, because their tracking ability over longer time periods, more than a couple months, is woeful during volatile times. It is really a good tool to quickly add risk or take some off.
Now is a great time to de-risk and by adding GLL you can keep some of the stocks you may have fallen in love with instead of selling and increasing cash. And of course you want to add a stop to this stock to limit losses. If the trade doesn’t work, you have to be willing to limit your losses. If you are someone that has trouble selling a stock for a loss, then you probably should avoid this. But if you want to be a bit savvy as CNBC screams how cheap the market it, which may be true but irrelevant in a bear market, then GLL is a good way to better position your portfolio for the first quarter of 2012.
I have a beneficial interest in GLL at the time of publication