July 24, 2024

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

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.


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%.

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

The Week in Precious Metals

Gold and silver continued their winning ways this week. Measured by the closing London PM Fix prices, gold gained $24.50 or 1.75%, while silver rose $1.89 or 5.81%. On an intraday basis, the gold price hit an all time high of $1,440.31 while silver traded to a new 31 year high at $35.55.

Gold’s advance for the week came after solid gains of $19 per ounce in the previous week.  Concerns about a weak dollar, skyrocketing oil prices and continuing turmoil in oil producing nations in the Middle East all contributed to reinforce the importance of gold for wealth diversification and as a hedge against a range of adverse economic conditions.

The ongoing surge in oil prices does not reflect an actual shortage in crude production.  Inventories remain robust and excess producing capacity seem adequate to replace all of Libya’s roughly 2 million barrels a year of production.  Rising oil prices reflect the fear that social unrest will spread to Saudi Arabia, the King of oil producers.

Saudi Arabia is surrounded by countries that are in massive social, religious and economic upheaval.   The contagion of violence and revolution has spread throughout the area included Algeria, Libya, Tunisia, Iran, Yemen and Bahrain.  If Saudi Arabia follows the path of its neighbors, the price of oil would quickly be on its way to $200 a barrel.  Small protests in the Saudi Kingdom this week may be a prelude to much larger upheaval in the months ahead.

Oil - Stockcharts.com

The money printing and inflation creation campaigns of the Federal Reserve seem to be giving the struggling U.S. economy some traction and there have been discussions by Fed members regarding the termination of quantitative easing after the current $600 billion round of money printing ends in June of this year.  However, much higher oil prices would quickly put the U.S. economy back into recession since consumer disposable incomes would be drastically reduced.

The Fed’s only easing option to fight another recession is to institute another round of money printing, which at some point leads to an inflationary spiral.  In Senate testimony this week, Fed Chief Bernanke admitted that “sustained rises in the prices of oil or other commodities would represent a threat both to economic  growth and to overall price stability.”  It is no surprise that gold is looking like a sensible option to more and more investors.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,427.00 +24.50 (+1.75%)
Silver $34.43 +1.89 (+5.81%)
Platinum $1,828.00 +37.00 (+2.07%)
Palladium $811.00 +26.00 (+3.31%

Platinum regained some of its luster with a gain of $37 after last week’s loss of $45, while palladium was up $26 following last week’s loss of $62.

After a gain of almost 2% last week, silver continued its sharp upward price movement and gained $1.89 or almost 6% on the week.  On a percentage basis, silver’s gain on the week was almost three times the gain seen by gold.  Since last summer, silver has vastly outperformed gold, a trend that may continue.

If the gold to silver ratio returns to its long term historical trend of 16, the price of silver would approach $100 per ounce at the current price of gold.

The price of the ProShares Ultra Silver (AGQ)  jumped $23 points on the week to close at $204.19 while the popular iShares Silver Trust (SLV) jumped $2 dollars or 6.2%, closely tracking the price of the metal.

AGQ - Yahoo Finance