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Should You Short Gold and Silver ETFs?

NEW YORK (ETF Expert) -- According to Steven Russolillo at WSJ.com, Goldman Sachs (GS) advises investors to short gold. Granted, the yellow metal has experienced a brutal downtrend that has lasted six arduous months.

What's more, you may not be able to find an uglier chart on a major asset class than the one for SPDR Gold Trust Shares (GLD).

If there's irony in the recent turn of events, it's the fact that precious metals traditionally offer safe passage in times of unusual economic uncertainty. The eurozone's deepening recession coupled with backlashes against anti-austerity would qualify. Contraction concerns in Japan combined with unprecedented levels of money printing also add to the probability of economic stagnation.

Moreover, the latest open-ended quantitative easing (QE) and subsequent bond buying by the Federal Reserve had been predicated on the very weakness recently seen in the labor force participation rate and corporate earnings warnings. So why has gold lost so much of its former glory?

For that matter, how did other precious metals ETFs like iShares Silver Trust (SLV) fall so far out of favor?

The answers that some are providing are unsatisfactory at best and misleading at worst. The chatter over a potential winding down of the Fed's trillion-dollar-per-year bond purchasing as early as the summertime has led folks to suggest that the dollar would strengthen at the expense of precious metals pricing.

For this answer to satisfy, one would have to believe Goldman's contention that our Fed-juiced economy was capable of moving from the wealth effect achieved through emergency measures to a self-sustaining second-half expansion.

With due respect to the strategists at Goldman, investors shouldn't forget their high-profile misses.

As recently as June 12, 2012, near the bottom of last year's May-June gloom, the same Steven Russolillo at WSJ.com reported that Goldman Sachs recommended clients build S&P 500 short positions due to the weakening economy. The market surged higher shortly thereafter.

Others should recall Goldman Sachs in May 2008, trumpeting $200 per barrel in oil; instead, it dropped nearly 80% from the $145-$150 per barrel level down around $30 per barrel in early 2009.

It's not that Goldman Sachs analysts fail to get it right. However, its predictions are just that... predictions. You can decide for yourself whether a given market, asset class or specific asset will move higher or lower based on a variety of indications.

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