There are growing signs of an approaching banking crisis in the United States, which means economic uncertainty could emerge, prompting investors to seek safe-haven assets such as, unsurprisingly, gold. This has been demonstrated in past crises such as the Great Financial Crisis of 2008 and the Savings and Credit Crisis of 1987. Gold is considered a safe haven and a hedge against inflation, which typically rises in times of crisis. Investing in the ProShares Ultra Gold ETF (UGL) and its leveraged exposure to gold presents the opportunity for those looking to benefit from a potential increase in the price of spot gold. Importantly, however, due to the leverage employed, it is important for investors to carefully consider the risks before investing in UGL.

The ProShares Ultra Gold ETF is an exchange-traded fund designed to provide investors with leveraged exposure to the price of gold. To achieve this, the fund uses financial derivatives such as futures and swaps, which have the potential to allow investors to increase returns in a rising gold market. UGL is not perfect, with a high 1% in annual management expense and decaying-value financial products owned (futures and swaps), but it has a very impressive track record since inception in December 2008, once averaging its annual returns and disregarding the 2011-12 peak in gold.

A plethora of historical examples show that banking crises can lead to an increase in gold prices. This was evident during the Savings and Loans Crisis, which occurred in the late 1980s and the early 1990s, which we mentioned above. From early 1989 to late 90, gold prices rose by more than 7%. There is also a perception that gold prices increase in times of high inflation. Banking crises can go hand in hand with elevated inflation, too. Because gold is seen as a hedge against inflation and its value rises when fiat currencies get devalued through excess printing. For instance, gold prices rose from $35 to $600 an ounce in the 1970s during the hyperinflationary period in the U.S.

Over the long term horizon, gold tends to outperform the S&P 500 following inversions of the yield curve in the U.S. Interestingly, in this context, the Treasury yield curve began inverting in July 2022. Since then, gold has outperformed U.S. equities, confirming this historical covariance.