May 16, 2024

Smart Money Sees the Perfect Storm for Gold and Silver Prices

April 13, 2011 by 1 Comment

A broad sell off in commodity prices triggered by a Goldman Sachs prediction of a “substantial pullback” in oil prices had little impact on the strong uptrend in gold and silver prices. Based on the London closing PM Fix Price, gold ended Tuesday off only $19 or 1.3% from Friday’s all time close. Silver, meanwhile, the absolute star of the precious metals group, closed Tuesday at $40.44, up 22 cents from Friday’s 31 year closing high. After the recent huge run up in both gold and silver prices, the very modest price declines suggests that the bulls are on the right side of the trade.

Every bull market has corrections and precious metals will not be an exception. The point to remember is that the U.S. has already passed the point of no return on its inevitable journey to a debt crisis.  The mainstream press focuses on the looming battle in Washington over raising the nation’s legal debt limit past $14.2 trillion, yet there is little discussion of the U.S. Government’s total unfunded liabilities of $75 trillion based on open ended entitlement programs.   The U.S. is in a debt trap from which a painless escape is impossible.

While the majority of Americans don’t know or don’t care about the spiraling debt disaster facing the Nation, smart money is taking steps to survive and profit from the inevitable day of reckoning.

One of the largest bond investors in the world who has a superb investment track record proclaims that U.S. debt securities have “little value.” In recent remarks, Bill Gross of Pimco candidly states his view on how the U.S. debt crisis will soon end. Mr. Gross states that Pimco has sold all holdings of U.S. debt because “they have little value within the context of a $75 trillion total debt burden. Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”

The smart money sees the future.  One logical investment alternative to preserving wealth is in the timeless currencies of gold and silver that governments cannot devalue.

The recent sorry spectacle in Washington only affirms that elected leaders are incapable of preventing an eventual U.S. default (see Why There Is No Upside Limit To Gold and Silver Prices).  After scaring half of the old ladies in the country that they wouldn’t get their next social security check, both political parties declared victory after “reducing spending” by $38 billion – a fraction of a percent of total government spending.  Even worse, the Washington Post reports that many of the “spending cuts” are accounting gimmicks and budget tricks that will not reduce overall spending.

The great “achievement” of Congress becomes even more pathetic after considering that the national debt has expanded by $3 trillion in the past two years and projected budgeted spending will add almost another $10 trillion in debt over the next 10 years.  These horrendous projections assume a growing economy and no major adverse macro economic shocks.

Massive  levels of debt and spending commitments leave the U.S. with two ruinous policy choices.  Congress can cut spending dramatically and watch the economy collapse after which the Government would re-institute massive spending programs and quantitative easing on an unimaginable scale.  The second choice is the odds on favorite – continue the parabolic increase in spending and money printing and watch the economy implode as all bond investors (not just Bill Gross) refuse to purchase worthless treasury debt leaving the U.S. unable to meet its obligations. Either way, the inescapable dilemma that the Nation faces has created the perfect storm for gold and silver.

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Ron Paul Links Bullion Coin Shortage To Horrendous Currency Debasement

April 8, 2011 by 7 Comments

Rep. Ron Paul, during a Subcommittee hearing on problems at the US Mint, linked the shortage of gold and silver coins to the “huge debasement” of the United States currency.

The remarks came during a hearing by the House Financial Services Subcommittee on Domestic Monetary Policy, entitled “Bullion Coin Programs of the United States Mint: Can They Be Improved?”  Four different coin and previous metals industry experts provided testimony on how to address ongoing problems with coin production and shortages.

After some lengthy discussion by witnesses and committee members regarding shortages of silver coin blanks and marketing and production problems at the US Mint, Rep. Paul focused on what he considered to be the primary reason why the US Mint was, at times, unable to meet public demand for gold and silver coins.

Listed below are highlights of Rep. Paul’s remarks at the Subcommittee hearing.

  1. It is “imperative” that the US Mint should be able to produce an adequate supply of coins to the U.S. public.  According to Rep. Paul, investors are rushing to purchase gold and silver due to quantitative easing by the Federal Reserve.
  2. The US Mint should take the appropriate steps to source enough planchets to meet public demand for gold and silver coins.  People are worried, stated Rep. Paul, and are trying to preserve their wealth through the purchase of gold and silver due to government policies that will lead to inflation and debasement of the currency.  Rep. Paul stated that “If we had a sound currency” there would not be a shortage of gold and silver coins since demand by the public would be a non event.
  3. Rep. Paul detailed the “horrendous huge debasement” that has occurred with the US currency.  In the early 1930’s, when gold was on a fixed exchange rate with the US dollar, the dollar was worth 1/20 ounce of gold.  It was subsequently devalued to 1/35 ounce of gold during the 1940’s, to 1/38 ounce of gold in the early 1970’s and to 1/42 in 1973.  Once it became legal for US citizens to own gold and the dollar was based on market prices, the value of one dollar subsequently dropped to 1/1450 ounce of gold.
  4. Rep. Paul noted that total annual demand during 2011 for Silver Eagle bullion coins should reach 48 million ounces, but that total US silver production would amount to only 40 million ounces.  The US Mint should take all necessary steps to ensure that adequate supplies of silver are available to meet public demand for silver coins.

Although not specifically addressed, the issue of whether the US government is making an effort to limit the sale of gold and silver coin to the public remains an open question.  By law, the US Mint is required to produce coins “in quantities and qualities that the Secretary determines are sufficient to meet public demand”.  There were no US Mint representatives present at the Subcommittee hearing to explain why the US Mint is unable to comply with production mandates specified by law.

Filed Under: Featured, Gold, Silver, US Mint Tagged With: , , , , , , ,

Silver Price Above $40 and Gold Hits New All Time High in Overseas Trading

April 8, 2011 by Leave a Comment

Gold soared to new all time highs in Asian markets and silver pierced the $40 per ounce level as new demand continues to drive precious metal prices higher.

The world spot price of gold hit an all time high of $1,470.80 up $12.40 and silver pierced the psychological $40 level, reaching $40.23 per ounce.  Platinum and palladium were also both up over 1% to $1,808 and $794, respectively.

Precious metal buyers had numerous reasons to be bullish including skyrocketing oil and food prices, the worsening situation with the European debt crisis, continuing conflicts in major oil producing countries and the ugly specter of a government shutdown in the U.S. due to the inability of Congress to come to grips with an exploding deficit and looming debt crisis (see Budget Fiasco Sends Wrong Message To U.S. Creditors).

Gold has now risen by over $31 per ounce this week and by $50 since March 28, breaking through resistance at the $1,450 level. Investors are seeking to protect their wealth from inflation and the continuing debasement of paper currencies as nation after nation continues to run huge deficits in an attempt to revive weak economies.  A glimpse of the end game to massive government deficits and liabilities is currently on display in Washington and the message is a resounding endorsement for diversifying out of paper money.  Politicians will not cut spending for a large variety of reasons, calling into question the future solvency of numerous sovereigns worldwide.

Silver has now advanced a spectacular $9.33 or 30% since the beginning of the year and shows no sign of slowing down.  According to the Silver Institute, world investment demand for silver skyrocketed by 40% during 2010 and was the primary reason for the huge 78% increase in silver prices last year.  Total fabrication demand, which accounted for 83% of silver demand last year,  increased by almost 13% despite the large rise in silver prices.

The looming global debt crisis and the printing of money has lead to surging investor demand for real assets.  Since late last summer when the Federal Reserve initiated its latest money printing campaign, the price of raw material prices as represented by the S&P GSCI Spot Index has soared by 35%.

Filed Under: Gold, Silver Tagged With: , , , , ,

Gold and Silver Prices Soar As Budget Fiasco Sends Wrong Message To U.S. Creditors

April 6, 2011 by 1 Comment

Gold and silver prices rose to new highs today on continuing concerns over a weak U.S. dollar, the European debt crisis, growing conflicts in the MidEast and escalating doubts over the ability of the United States to avoid a debt crisis.  The ongoing budget charade in Washington makes it perfectly clear that neither political party has the desire or ability to seriously address the exploding level of U.S. debt.

Gold hit a new all time high of $1463.70 and silver reached a 31 year high at $39.79.  Prices of both metals eased in early afternoon trading with the New York Spot Price for gold at $1456.70 and silver down fractionally at $39.33.  The limit on future increases in precious metals prices has effectively been removed due to the absolute inability of Congress to address the looming debt crisis.

GOLD - COURTESY STOCKCHARTS.COM

With the United States facing a $1.5 trillion dollar deficit on a projected budget of $3.6 trillion, politicians are threatening to shut down the Government over their inability to agree on whether spending should be cut by $40 or $60 billion.  Does anyone really believe that Congress is capable of coming to terms with the reality of an exploding deficit and spiraling national debt when agreement cannot be reached on $20 billion – a mere one half of one percent of total government spending?

The surge in gold prices reflects the realization that the nation is on the fast track to higher interest rates, a spiraling increase in the cost of living and a continued debasement of the U.S. dollar (see Why There Is No Upside Limit To Gold and Silver Prices).

Meanwhile, as the threat of a Government shutdown looms, Treasury Secretary Geithner warned of dire consequences if the U.S. is not allowed to borrow more money by raising the debt ceiling above its current limit of $14.3 trillion.  At a meeting with a Senate Appropriations subcommittee Secretary Geithner forecast that a U.S. default would lead to much higher interest rates, the failure of hundreds of thousands of businesses, payment cuts to senior citizens and a financial crisis worse than that of 2008 – 2009.

Geithner’s prediction of Armageddon, unfortunately, comes with no prescription on how to reign in out of control Government financial policies which are the fundamental threat to the country’s economic future.  It’s not just this year’s or last year’s multi trillion dollar deficits that are the root of concern, but rather the massive long term structural deficits that are now built into Government spending budgets.

The debt limit will eventually be raised and both political parties will claim victory.  America’s creditors will ponder the increasing risk of U.S. Treasury debt and ultimately conclude that the U.S. has no will to fix a financial system on the brink of insolvency.  The ultimate day of financial Armageddon, alluded to by Secretary Geithner, will not be forestalled by our unworkable political process.  The final reckoning and hard choices will be made only when forced upon us by markets that refuse to finance additional U.S. borrowing.

Filed Under: Gold, Silver Tagged With: , , , , , ,

Proshares Ultra Silver (AGQ) Delivers Huge Gains On Soaring Silver Price

April 5, 2011 by 3 Comments

Surging silver prices over the past two years have resulted in huge gains for silver investors. The price of silver bullion has skyrocketed from the $8 level in late 2008 to a New York Spot Price of over $39 per ounce today for a gain of 388%.

Besides directly purchasing silver bullion, other common ways to profit from the silver bull market include investing in silver stocks or silver Exchange Traded Funds (ETF).  The inconvenience and higher transaction costs of investing directly in physical silver has resulted in a major flow of investment dollars into silver ETFs.

The largest silver ETF, the iShares Silver Trust (SLV), has attracted huge investor interest and has seen an astonishing increase in asset growth. The SLV, which held $263.5 million in silver at its inception in April 2006, closed today with total net assets of $13.7 billion. The SLV is structured so that its net asset value per share approximates the value of one ounce of silver bullion. The SLV has worked as it was designed to and the returns are comparable to the return from a direct investment in silver bullion.

There is another silver ETF, however, that has been the standout winner for silver investors.  The ProShares Ultra Silver (AGQ) has soared from its initial $22 a share price in December 2008 to a closing price today of $243.98, providing initial investors with a gain of over 1,000%.   According to ProShares, the AGQ seeks to provide for a single day twice the return of silver bullion as measured by the London Fix Price.  The gain on the AGQ has exceeded the returns on silver bullion, the SLV, and a basket of silver stocks by a wide margin as can be seen below.

AGQ VS SLV AND SIL - YAHOO FINANCE

The AGQ was launched by ProShares on December 1, 2008, trades on the New York Stock Exchange and is defined by the Commodity Exchange Act as a commodity pool.  ProShares is part of the ProFunds Group which manages over $31 billion in mutual funds and ETFs.  ProShares also offers the UltraShort Silver (ZSL) which is a double inverse ETF and the exact opposite of the AGQ.  The ZSL seeks to produce a 200% opposite investment result of a long position in silver and will therefore increase in value if the price of silver declines.

One important element that investors should be aware of is that the AGQ does not hold physical silver, as is the case with SLV and PSLV.  The AGQ seeks to achieve its stated investment objective by owning financial instruments whose underlying value is correlated to the price of silver.  The AGQ may hold various complex financial instruments such as forward contracts, option contracts, swap agreements and futures contracts. As of April 5, 2011, the ProShares Ultra Silver held the majority of its assets in silver forward contracts.

The ProShares prospectus states that ProShares Ultra Silver seeks a 200% return on the performance of silver bullion “for a single day” since returns over periods greater than one day could vary in direction or amount from the target return due to compounding of daily returns.  The four factors cited by ProShares that could result in differences between daily and long term returns are index volatility, inverse multiples, holding periods, and leverage.

As every investor knows, greater rewards usually involve taking greater risks and the AGQ is no exception to this rule.  ProShares uses complex financial instruments that are subject to volatility in order to achieve leveraged results and the Ultra Silver ETF is therefore subject to much greater risk than investments in traditional silver securities.  ProShares warns investors that certain financial instruments held by the AGQ may be “subject the fund to counterparty risk and credit risk, which could result in significant losses for the fund”.  ProShares also notes that the Ultra Silver ETF is non-diversified and entails risks associated with the use of derivatives.

The bottom line is that the ProShare Ultra Silver is much riskier than investing in silver trust ETFs, silver stocks, or silver bullion and should therefore be used only by knowledgeable investors.   As long as silver continues to increase in value, investors are likely to see outsized gains in the AGQ.  Leverage, however, works both ways and a sharp price correction in silver would result in significant losses to investors in the AGQ. An example of how severe losses can be in a leveraged ETF can be seen by looking at the investment results of the ZSL which is designed to go up in value if the price of silver declines.

ProShares introduced the ZSL when silver was below $10 per ounce and, needless to say, initial investors who maintained an investment in the ZSL have experienced devastating losses.  The ZSL has declined almost 50% this year and since its inception in late 2008, has experienced a split adjusted decline of over 95%.

Filed Under: Featured, Silver Tagged With: , , , , ,

Why There Is No Upside Limit for Gold and Silver Prices

March 31, 2011 by 1 Comment

The past decade has seen a virtually nonstop advance in the price of gold.  Silver, which lagged gold until last year,  recently hit a 31 year price high.  Gold and silver, both used as currency for thousands of years, have gained broad investor appeal as a hedge against paper currencies.

The increase in the value of gold and silver is due to the fiscal and monetary policies of nations struggling to deal with massive levels of debt – policies that virtually guarantee a continued rise in the price of gold and silver.

Central banks, having exhausted all conventional means of monetary easing, have moved on to the last resort option of quantitative easing and currency debasement.  Federal Reserve Chairman Bernanke has twice resorted to the printing presses, and then shamelessly explained the “virtues” of his money printing policy (in convoluted terms) to a gullible public on national television.  The subsequent absence of broad public opposition to a policy that is certain to ultimately destroy the financial well being of most Americans seems based on ignorance and/or indifference.

One American who is not ignorant or indifferent to the Fed’s policy of printing money issued a dire warning this week on the dangerous path the Federal Reserve has taken.  The reason we should all pay great attention to this warning is because it was issued by a powerful policy maker at the Federal Reserve.

According to Reuters, Richard Fisher, President of the Dallas Federal Reserve stated in a speech that the debt situation in the U.S. is at a “tipping point.” He is quoted as saying, “If we continue down on the path on which the fiscal authorities put us, we will become insolvent.  The question is when”.   Bank President Fisher further said that no additional extraordinary measures should be taken when the current round of money printing ends in June of this year.

We shall see what happens comes mid year when QE2 is scheduled to end.  The problem facing the Fed is that they are out of conventional policy bullets to ease credit conditions with rates already at zero.  The ease and apparent lack of consequences in printing money has made additional quantitative easing a very seductive method of  allowing huge deficit spending by the government.  QE2 is a thinly disguised monetization of the Federal deficit in which the Federal Reserve purchases government debt from the primary dealers after they purchase the debt at Treasury auctions.

Government officials argue that unprecedented deficit spending and quantitative easing are necessary to stimulate economic  growth, but this theory has not worked in the real world.  Despite trillions in stimulus spending,  job creation and economic growth have been extremely weak and are likely to remain so according to economists Kenneth Rogoff and Carmen Reinhart who wrote This Time Is Different: Eight Centuries of Financial Folly.  According to Rogoff and Reinhart, economic growth is subpar when public sector debt exceeds 90% of GPD which the U.S. and many other developed nations have already surpassed.  In addition, a recovery of the job and housing markets after a financial crisis take many years due to the burden of excessive levels of debt.  Ultimately, Rogoff and Reinhart predict that austerity measures will need to be imposed along with some type of debt restructuring.

Is the U.S. capable of reducing spending and  instituting austerity measures? Cutting deficits means cutting payments to a long list of incomeless recipients who really don’t care where the entitlement money comes from.  Those still actually paying taxes will object strongly to any proposed tax increase to fund government spending.  Unable to cut spending or raise taxes leaves the Government with one bad option – print more money.

Politicians, who value getting elected above all else, are likely to strong arm the reliably compliant Federal Reserve Chairman Ben Bernanke to “come to the rescue” again with QE3.   In the minds of politicians and Federal Reserve officials, there will always be very compelling reasons to continue borrowing and money printing.  With the expected retirement of Federal Reserve Bank of Kansas President Thomas Hoenig this October, the Federal Reserve will be dominated by dovish members who favor the easy money policies of Fed Chairman Bernanke.  President Hoenig is one of the few Fed members who oppose continued zero interest rates and quantitative easing.

The correlation between parabolic increases in government debt and the price of gold is clear.   Since 2000 both government borrowing and the price of gold have been closely correlated as seen below.  The increased value of gold directly reflects the decreasing value of paper money.

A nation that has reached the limits on taxation and borrowing has few viable policy options other than a continuing series of quantitative easing programs.  Current government policies, if left unchanged, virtually guarantee a continued increase in the price of precious metals.

TOTAL PUBLIC DEBT

GOLD PRICE - COURTESY KITCO.COM

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Gold Price Hits All Time High, Silver At 31 Year High

March 24, 2011 by Leave a Comment

The price of gold hit an all time highs for the second day in a row, while silver prices moved up to a new 31 year high.

As measured by the closing London P.M. Fix Price, gold reached an all time high of  $1,447.00 up from yesterday’s all time high of $1,439.50.  The previous record London Fix Price was $1,437.50 on March 7th.   The all time record high intraday price of gold was also reached on March 7th at $1,444.95.  Earlier in the day, Comex gold futures had hit an all time high of $1,448.60 before a pull back erased the day’s gains.  In late afternoon trading the bid on New York spot gold was $1,431.30.

Silver futures scored another new 31 year high at $38.18 before sliding to $37.45 in New York spot trading.   The closing London P.M. Fix Price for silver was $37.78.

GOLD - COURTESY STOCKCHARTS.COM

In 2010, the price of gold advanced by 30% as investors grew increasing nervous about the value of paper currencies and the increasing threat of inflation.  The U.S. Federal Reserve policy of printing money to fund government deficits sets a horrendous precedence and it appears that other central banks will soon be conducting their own versions of quantitative easing.

The European Central Bank is struggling to prevent numerous sovereign defaults in an effort to preserve the European Union and monetization of the debt seems to be the only feasible “solution”.   Japan, the most heavily indebted developed nation in the world, needs hundreds of billions of dollars for reconstruction after a devastating earthquake and the printing press seems to be their only option.

Reflecting on the fiscal and monetary policies being conducted by the U.S. Government, Warren Buffet stated that “We’re following policies that will lead to a lot of inflation down the road unless changes are made.  The U.S. can’t run the kind of deficits we’re running and other policies without it being enormously inflationary”.

Unfortunately, intelligent changes are not being made and the ruinous policies of central banks seems likely to continue at an accelerated rate.  Gold has broken out to new highs and should see significant price gains in 2011.

Filed Under: Featured, Gold, Silver Tagged With: , , ,

iShares Silver Trust Hits New All Time High

March 23, 2011 by Leave a Comment

During Wednesday trading, the iShares Silver Trust (SLV) reached an all time high price.  At the time of this post, shares were trading up 78 cents to $36.32, which exceeds the previous high of $35.27 reached in early March.

The SLV saw a month long correction in January with the price declining from $30 to $26, which brought the SLV below its 50 day moving average.  The losses on the brief pullback in January were quickly regained and the SLV powered on to new highs by mid February.  The SLV has now jumped more than $10 from its January low, for a gain of over 38% in less than two months.

SLV - COURTESY STOCKCHARTS.COM

Ownership of the SLV gives an investor an undivided, fractional ownership in the physical silver held by the iShares Silver Trust.  The price of the SLV is structured to reflect the underlying price movement in silver.  The gain or loss on the SLV should very closely track the price of one ounce of silver. Over 97% of the Trust’s net asset value is based on physical silver held by the Trust.

The Silver Trust currently holds over 352 million ounces of silver worth $12.7 billion.   Assets of the SLV have grown steadily since the inception of the Trust in April 2006.  The SLV has become extremely popular with investors seeking to establish a position in silver without the costs and risks of taking physical possession of the metal.  Due to the manner in which the Trust is structured, premiums and discounts to the net asset value during the trading day are typically less than 1%.

Investors have seen huge returns on their investment in the iShares Silver Trust.   Last year the SLV rose 79.4%.  Year to date the SLV is up 18.6%.  Since inception of the Silver Trust in April 2006, the net asset value of the SLV has almost tripled from its initial price of  $12.55.   A $5,000 investment in the SLV in April of 2006 is now valued at $14,455.

Filed Under: Silver Tagged With: , , ,

US Mint Boosts America the Beautiful Silver Bullion Coin Production

March 22, 2011 by 4 Comments

The United States Mint plans to issue the first of this year’s America the Beautiful Silver Bullion Coins in late April. Last year, the series caused quite a stir when the low mintages made them more akin to scarce collectibles than bullion coins. For the current year, the US Mint has planned significantly higher production levels that will eliminate some of the excitement, but hopefully allow the coins to trade as intended, based primarily on the precious metals content.

The coins are struck in 5 troy ounces of .999 fine silver, representing the first time the US Mint has offered bullion coins with a weight greater than one ounce. The designs are exact duplicates of the America the Beautiful Quarters series, which features five different releases annually depicting National Parks or sites in each of the states and territories. The oversized bullion coins also include edge lettering indicating the weight and fineness of the precious metals content.

Each of the 2010-dated bullion releases had a limited production of 33,000 units each. The US Mint tried to solve the problem of high demand for a limited supply by requiring their primary distributors to follow specific terms and conditions, which capped premiums and sought broad distribution.

Recent reports indicate that the US Mint has produced 125,000 of the first 2011-dated releases featuring Gettysburg National Military Park. With production closer to market demand, the same terms and conditions will not apply for the distribution of this year’s coins. However, in order for the primary distributors to participate, they must certify that they have sold their complete allocation from last year in accordance with the rules established by the US Mint.

The remaining 2011-dated releases will feature Glacier National Park, Olympic National Park, Vicksburg National Military Park, and Chickasaw National Recreation Area. These will be released at intervals throughout the year.

With higher mintages, there will be less collector allure for the 2011 coins, however, the status of the 2010 coins as desirable rarities may be reinforced. If the US Mint manages to keep production levels high for the reminder of the twelve year series, the 2010 coins will take on the status of key dates for the bullion series.

Filed Under: Featured, Silver Tagged With: , , ,

ProShares Ultrashort Silver (ZSL) – Double Inverse Silver ETF

March 8, 2011 by 1 Comment

Many of us have been accumulating large positions in silver bullion and silver mining shares. Whether these positions have been held for decades or only for the past year, the recent explosive move up in the silver price has caused some to wonder if there is a way to protect gains from a possible pull back in silver prices.

The bull market in silver has a long ways to go considering the perilous state of sovereign finances, surging commodity prices, and the risk of political and military turmoil in Saudi Arabia. Nonetheless, it is normal for every bull market to experience sharp price sell offs, such as the almost $300 per ounce drop in gold prices during 2008. An experienced investor with a long term view and fundamental understanding of the long term appeal of gold would have used this occasion to increase gold positions in a portfolio.

For investors who may be short term bearish and do not wish to see their portfolio take a steep dive, hedging against a significant short term sell off may make sense and increase overall portfolio returns.

Investors in silver sitting on a 400% gain since October 2008 and wishing to protect profits may consider the purchase of an offsetting position in the ProShares UltraShort Silver (ZSL) to protect profits. Investments in commodities or precious metals can exhibit very volatile price movements. In 2008, the price of silver dropped by 50% in four months, possibly prompting some investors to sell their positions and miss out on the explosive upward move that followed. Hedging volatility to protect large gains without reducing core silver holdings is possible for the average investor by purchasing the ZSL.

The Ultrashort Silver (ZSL) is an inverse ETF that seeks to produce twice (200%) the opposite investment result of the daily price movement in silver. An inverse ETF for silver is therefore a means of profiting from a downward move in silver as measured by the U.S. London fix price. In theory, a 10% drop in the price of silver would result in a 20% gain in the price of the ZSL.

The ZSL trades on the New York Stock Exchange and was launched by ProShares which offers the largest selection of leveraged and inverse ETFs. ProShares is part of the ProFunds Group which has $31 billion in ETF and mutual fund assets.

The ZSL does physically hold any position in silver bullion. In order to achieve a 200% inverse investment result of the price change in silver, the ZSL positions itself daily through the use of financial instruments whose value is based on the underlying silver price. The complex financial instruments used to achieve the ZSL’s investment objectives include swap agreements, forward contracts, futures contracts and option contracts.

ProShares states that the ZSL seeks achievement of the targeted returns for only a single day since investment returns beyond a day can be higher or lower than the 200% inverse investment return objective. According to ProShares, the four factors affecting the divergence between daily and long term investment results are the holding periods, index volatility, leverage and inverse multiples. An investment in the ZSL should be monitored daily since the return for longer periods of time can vary significantly from short term results.

For the investor who understands the risks associated with a double inverse ETF, the ZSL can be a valuable tool to manage the risk of a large investment in silver. The four most common uses of the ZSL (according to ProShares) is to help hedge a silver portfolio, obtain greater profits (or loss) through leverage, commit less cash investment for a specific level of silver exposure, and to reduce exposure to a silver position without a reduction of portfolio holdings.

Ironically, the ZSL was launched near the bottom of the silver market in late 2008 and the investment results have been catastrophic for a buy and hold investor in ZSL. The split adjusted price of ZSL has dropped from $1100 to the mid $20’s as the price of silver soared.  Leverage works on both the upside and downside to magnify investment results and in this regard the ZSL was successful. During 2010, the ZSL had a 77% loss and has declined even further during 2011.

Whether or not the ZSL will be a profitable investment in the future is unknown but it is one investment strategy that can be used to hedge a potential drop in silver prices.

Filed Under: Silver Tagged With: , , , , , ,