October 5, 2022

Gold At Record High As Silver Price Soars Towards $50 – Why The Rally Will Continue

As government spending spirals out of control and the Federal Reserve perpetuates a deliberate strategy of currency debasement, precious metals prices continued to soar. Gold, as measured by the London PM Fix Price, closed at $1504.00, up $27.25 on a shortened four day trading week .

Gold has gained $86 during April and $185 from its January low of $1,319.  The price acceleration in April comes in the aftermath of the government’s dismal failure to reduce deficit spending, even as S&P warned of a credit ratings downgrade for the U.S.  The great budget compromise reached by both parties was soon exposed as a shameful hoax by the Congressional Budget Office, which said that government spending would actually be higher after the “budget cuts” due to gimmicks.

As unsustainable government debt continues to balloon and the Fed continues to print money, the dollar is getting trashed. Governments worldwide are taking steps to protect themselves from the Fed’s explicit policy of dollar debasement and this means selling dollars.  The US dollar has fallen almost 10% since the beginning of the year.  Gold and silver are becoming the de facto reserve currency, as the flight from dollars intensifies.

US Dollar- COURTESY STOCKCHARTS.COM

Silver has continued to confound the bears with another standout performance, gaining $3.65 or 8.57% on the week, after gaining $2.39 in the previous week. The closing price for silver as measured by the London PM Fix Price was $46.26.   Silver is rapidly closing in on its all time closing high of $48.70 hit in January 1980. The current price momentum in silver could easily push silver into new all time highs next week.

The huge rally in silver prices has some wondering if there will be a pullback soon.  Silver has gained $8.63 per ounce this month for a 22% gain.   Since the January low of $26.68, silver has gained a spectacular $19.58 per ounce for a huge gain of 73%.  The question is not one of if, but rather of when there will be a pullback – a routine event in every bull market.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,504.00 +27.25 (+1.84%)
Silver $46.26 +3.65(+8.57%)
Platinum $1,812.00 +25.00 (+1.40%)
Palladium $765.00 -7.00 (-0.91%)

But perhaps the bears will have to wait a while longer for the much anticipated pullback.  The volume in put options on the silver ETFs has seen numerous days of record volume, implying that some big players are betting on a significant decline in silver prices.  Does the record put buying on silver reflect speculators betting on a silver plunge or merely long time silver investors hedging long positions?  Either way, the implication is that the expectations for a silver pullback seems to be growing, but markets rarely accommodate investors’ perceptions of when a market is truly overbought – expect higher silver prices to shock the put buyers in silver.

Long term, any price pullback in silver should be looked at as a gift.  Financial players should never “fight the Fed”  and in this case, both Federal Reserve and Government policies guarantee higher precious metals prices (see Why There Is No Upside Limit To Gold and Silver Prices).

For Silver, This Time It’s Different

To many investors with a sense of history, the four most dangerous words are “this time it’s different”. The phrase is usually evoked in an attempt to justify why a huge price gain in a particular asset class can continue to defy common sense and historical valuation norms. A surfeit of explanations on why “this time is different” is usually enough to send seasoned investors to the exits.

Silver, having defied the low expectations of many investors, has now seen a monster rally of 392% from $8.88 in October 2008 to the recent market price of $43.67. The pace of the advance has gone almost vertical with silver gaining 60% from the lows of late January.

Long term silver investors no doubt remember the aftermath of the last rapid run up in silver prices to $48.70 in January 1980. Silver prices collapsed shortly thereafter and ultimately slid to the $5 range where it remained throughout the 1990’s. Silver dropped off the radar for most investors and remained dead money for 25 years before decisively breaking out of a very long base in early 2006.

Will history repeat with another meltdown in silver prices at some near point in the future, or is the rise in silver prices indicative of a major trend change in our economic future? I have never believed that the mechanical application of past price trends was a useful tool for predicting the future. Each point is history is unique with new players and new sets of circumstances. Understanding today’s fundamentals are far more important than ascribing importance to past events that are largely irrelevant.

To understand why silver prices are in the initial stages of a long term super cycle advance rather than a replay of the 1980’s, it is necessary to review the differences of the late 1970’s compared to our current situation. Gold and silver both advanced in the 1970’s as a booming, demand driven economy fueled inflation. The huge cost of financing the Vietnam War, low employment and surging wages all contributed to a steadily rising rate of inflation which peaked at 13.5% in 1981. Federal Reserve Chairman Paul Volcker finally stopped inflation dead in its tracks through a series of massive interest rate increases which brought the prime rate to a high of 21.5% in mid 1981. High interest rates caused a severe recession but by 1983, the rate of inflation had collapsed to 3.2%.

Both gold and silver moved dramatically higher during the inflation surge of the late 1970’s and early 1980’s but the meteoric rise in silver prices was driven by specific events. Wealthy brothers Nelson and William Hunt acquired a massive position in silver in an attempt to corner the market. Prices skyrocketed on the news and silver went from $11 per ounce in late 1979 to $48.70 in early 1980. Regulators did not take kindly to market manipulation and margin requirements on commodities were dramatically raised. The Hunt brothers’  ill conceived attempt to drive silver prices higher collapsed along with their net worth. Silver prices plunged to less than $11 per ounce within two months. The last great silver “bull market” lasted less than six months, driven not by fundamental demand but rather by heavily leveraged speculators.

Fast forward 30 years – the finances of governments worldwide have reached the tipping point under ballooning debt levels and massive deficits. Additional borrowing by insolvent nations to rollover debt simply delays the day of reckoning – more debt is not the solution for too much debt.

The message from the gold and silver markets is clear – governments have reached the limits on borrowing and the day of debt Armageddon is approaching. The accelerating exodus from paper assets to historical stores of value is only in its initial stages as desperate governments take desperate measures to stay afloat (see Smart Money Sees The Perfect Storm for Gold and Silver).

The great debt bubble of the United States and much of the rest of the world is reaching its end game as creditors realize that a stealth default of some type is inevitable via a combination of inflation, money printing, currency debasement and/or negative interest rates.  Nor is it likely that S&P’s lowered outlook on U.S. government debt to negative from stable will have any affect on reining in ballooning U.S. debt (see Why There Is No Upside Limit To Gold and Silver Prices).

From a long term perspective, perhaps this time is not different but simply a replay of the history of currencies backed only by the “full faith and credit” of governments.  Voltaire had this to say regarding fiat money – “Paper money eventually returns to its intrinsic value – zero”.

Gold and Silver Reach Record Highs While Ron Paul Weighs In On Spending Fiasco

Silver was again the star performer in the precious metals group, hitting a new yearly high of $42.61.  For  the second week in a row, silver has added over $2 per ounce as measured by London PM Fix Price.  After soaring $2.59 in the previous week, silver capped another standout week with a gain of $2.39.

As a long time patient investor in silver, the moves over the past couple of years have been nothing less than amazing.  In the early 1990’s, a one ounce silver eagle  did not cost much more than $5 per coin.  In just the past two weeks we have witnessed silver increase in value by $4.98 per ounce.  Am I nervous about the rapid appreciation or worrying about a correction that the main stream press is calling for?

Not in the least – I am in silver for the long term and the policies of our government and central bank virtually guarantee much larger profits in the future (see Why Gold and Silver Have No Upside Limit, and Budget Fiasco Sends Wrong Message To Creditors and The Perfect Storm for Gold and Silver).

Any price corrections in the precious metals (and yes they will happen) should be viewed as opportunities to increase positions.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,476.75 +7.25 (+0.49%)
Silver $42.61 +2.39(+5.94%)
Platinum $1,787.00 -16.00 (-0.89%)
Palladium $772.00 -26.00 (-3.26%)

Gold, as measured by the closing London PM Fix Price, hit another all time high, closing at $1,476.75, up $7.25 on the week after running up $51.50 in the previous week. After breaking out of its base in the $1,450 range, gold could be getting ready for a substantial move upwards.

Paper money is all about confidence and, to anyone paying attention, last week’s “budget compromise” proved conclusively that our government is absolutely incapable of reducing spending.  After threatening us with a government shutdown and terrifying half of the citizens of this Nation with a potential cutoff of entitlements, both political parties proclaimed victory with an inconsequential  spending reduction of $38 billion.  Keep in mind that this year’s deficit is almost 37 times the proposed spending cuts.

The problem with the “compromise cuts”  is that both political parties lied to us and they were called out by the Congressional Budget Office (CBO) which said actual spending would be reduced by only a laughable $352 million.  Futhermore, the CBO noted that when “emergency spending” and the cost of multiple wars is factored in, actual spending would actually be $3 billion higher than the 2011 budget forecast.  It is not by accident that gold and silver have been soaring.

Ron Paul, one of the very few courageous and honest politicians that this country is lucky to have, said the following in a commentary about the latest events in Washington.

Last week, Congress and the administration refused to seriously consider the problem of government spending.  Despite the fear-mongering, a government shutdown would not have been as bad as claimed.

A compromise was struck at the last minute, but until Democrats agree to rein in entitlement spending, and Republicans back off the blank checks to the military industrial complex, it all amounts to political gamesmanship.

Unfortunately, the compromises always seem to be just the opposite.  Instead of the left agreeing to cut social spending and the right agreeing to cut military spending, the right agrees to more welfare and the left agrees to more warfare.  In spite of all the rhetoric, we will go deeper in debt, the Fed will print more money, and the value of the dollar will continue to plummet.  How long will it be before foreigners stop buying our debt, and hyperinflation arrives?  Throughout history, empires have always overextended themselves through conquests and wealth transfers leading to eventual collapse, from the Roman Empire to the Soviet Union.  We are headed in the same direction and it seems only the chaos of the collapse of the dollar will stop the spending spree.  Arguing over funding for Planned Parenthood and NPR, though important, only shows that leadership in Washington either won’t face reality, or don’t understand how serious the problem is.

Of course, an actual government collapse would create serious problems for many people who have come to depend on government payments for healthcare, retirement income, their children’s education, and even food and housing.  However, these so-called entitlement programs are unconstitutional to begin with and have engendered a culture of dependence on wealth transfer payments that is out of control. It concerns me greatly that instead of dealing seriously with our situation, so many in Washington would rather allow the chaos that will ensue when all of the dependent people are suddenly cut off.  Better to look reality squarely in the face and tell people the difficult truth that government is simply not capable of managing people’s lives from cradle to grave as was foolishly promised.  We face trillions in deficits with any of the budgets under consideration.  Keeping those promises is, sadly, just not one of our options in the long run.  Better to admit the nanny state is coming to an end and we are no longer working on “compromises” but a transition – to a sustainable way of life, one that respects the constitution, the rule of law and property rights.

In a sign that perhaps the economy may not be as strong going forward as some seem to think, industrial metals platinum and palladium both sold off on the week.   Platinum ended down $16 at $1,787 while palladium lost $26 to $772.

Price Pullbacks in Silver Becoming Shorter and More Shallow

Silver prices continued streaking higher today on fears of a plunging dollar, rampant money printing by central banks, and talk in Europe of a looming debt restructuring (default) by Greece.

In late afternoon trading silver was up $1.22 to $41.88, a 3% gain for the day.  Since decisively breaking through the $15 price range in early 2008, silver has been in a major bullish uptrend with price pullbacks becoming shorter in duration and more shallow in their extent.

SILVER - COURTESY KITCO.COM

Silver reached an intermediary high of $20.92 in March 2008.  As the financial world headed for a meltdown in late 2008 and every asset class in the world was liquidated, silver experienced a sharp sell off and by October 2008 reached a low of $8.88.  The 2008 low represented a price consolidation of 40% from the base silver had established at the $15 range.

The ensuing recovery in silver took a little over a year before the price once again approached the $20 per ounce level.  In December 2009 silver hit a high for the year at $19.18.  After a brief consolidation below $18 in early 2010, silver broke out of its base in the $18 range  to reach a high of $30.70 in December 2010. The price of silver ended the year up $13.46, for a gain of 78.4% on the year.

In January of 2011 silver again consolidated briefly and pulled back $3.95 or 13% to a low of $26.68 on January 28th.  This month-long pullback turned out to be another fantastic buying opportunity as silver recovered its losses and rose to $36.60 by March 7th.

Over the next 7 trading days, silver consolidated again, declining  from $36.60 on March 7th to $33.88 on March 15th for a loss of $2.72 or 7.4%.  Silver then rallied again to a new annual of $41.37 on April 11th.

Silver’s most recent pullback was the shortest of them all, declining from $41.37 on April 11th to $40.22 on April 13th for a loss of $1.15 or 2.8%. The losses were quickly recovered and a new 31 year high was reached, with silver recently trading at nearly $42 per ounce.

Investors who seized the opportunity to purchase silver on price pullbacks over the past four years have made fantastic profits.  As the bull market in silver has progressed, these pullbacks have become shorter in duration and more shallow in price. This situation seems to be reaching its extreme, where pullbacks last not months, not days, but mere hours. Investors have started to capitalize on even the smallest price declines to increase their positions and drive prices higher.

Smart Money Sees the Perfect Storm for Gold and Silver Prices

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.

Gold Hits All Time High and Silver Breaks $40 as Precious Metal Demand Soars

Anything but paper dollars was the theme this week as investors rushed into anything of tangible value.  Gold, silver, oil and commodities of all types have been skyrocketing since last August when the Federal Reserve announced its second round of quantitative easing.

Gold closed at an all time high of $1,469.50 as measured by the London PM Fix Price and silver hit a 31 year high closing the week at $40.22.  Some analysts cautioned that the rapid rise in gold and silver prices could lead to a pullback, but overbought markets tend to defy such logic.  Gold has decisively broken through resistance at the $1,450 level and silver looks ready to challenge the all time high of $48.70 reached in 1980.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,469.50 +51.50 (+3.63%)
Silver $40.22 +2.59 (+6.88%)
Platinum $1,803.00 +30.00 (+1.69%)
Palladium $798.00 +26.00 (+3.37%)

The surge in precious metals prices reflects the obvious conclusion that developed nations of the world are on a trajectory with a potentially devastating debt crisis.  The budget antics in Washington make it clear to any impartial observer that spending will not be cut and the parabolic growth of debt will continue.  No one knows how the looming debt crisis will ultimately play out for the Nation, but one certain outcome is that the dollar’s purchasing power is likely to diminish greatly (see Ron Paul Talks About Horrendous Currency Debasement).

Gold rose by $51.50 on the week and is up over $300 per ounce over the past year.

GOLD - COURTESY STOCKCHARTS.COM

Silver has been the standout performer over the past year, increasing by over 122% since last August.  This week was no exception with silver sprinting past the $40 mark and gaining 6.9% on the week. Despite the large increase in the price of one ounce of silver, the Silver Institute reports that both investment and fabrication demand soared last year.  During 2010, world investment demand for silver increased by 40% and fabrication demand (which accounts for 83% of total silver demand) rose by 13%.

Platinum and palladium also rose on the week, recouping the price correction experienced after the Japanese earthquake.  Platinum rose by $30 on the week to $1,803 while palladium rose by $26 to $798.

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

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%.

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

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.

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.

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%.

Gold and Silver Consolidate Recent Gains As Threat Of Sovereign Defaults Grows

Gold and silver prices, as measured by the London PM Fix Price, were largely unchanged on the week.  Gold slipped by $18 per ounce while silver declined modestly by $.05

Gold has rallied almost $100 per ounce since late January but has failed to decisively break out to new all time highs.  Silver, the standout performer in the precious metals sector has rallied furiously since late January, gaining $10 per ounce for an increase of 36%.

SILVER - COURTESY KITCOSILVER.COM

Despite the current attempt by Congress to implement very modest budget reductions,  fewer and fewer people seem to have faith in the long term value of the dollar.  The value of gold has not gone up for 10 years straight by accident – it is the result massive increases in debt and the looming threat of paper currency depreciation as governments resort to the printing presses to avoid defaulting.  (See Why There Is No Upside Limit for Gold and Silver).  Recent comments by two prominent individuals reinforce the view that the potential fallout from the debt crisis will be severe.

Bill Gross of Pimco, the world’s largest bond investor, writes in his April 2011 Investment Outlook,  “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”.

John Lipsky of the International Monetary Fund warned that the level of debt by developed nations is unsustainable, having reached levels last witnessed after the end of World War II.  According to Mr. Lipsky, “The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks.  The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion”.

The reality of a democracy is that we elect those who promise to provide us with the most benefits and entitlements.  Under these constraints, the temptation by elected officials to use printed money to meet promises that cannot be kept is irresistible.  Yes, the promises will be kept but they will be paid for in dollars that have little purchasing value.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,418.00 -18.00 (-1.25%)
Silver $37.63 -0.05 (-0.13%)
Platinum $1,773.00 +21.00 (+1.20%)
Palladium $772.00 +18.00 (+2.39%)

Platinum and palladium both gained on the week, continuing a rebound from recent sell off lows reached during the height of the panic related to the Japanese earthquake.  Since mid March, platinum has gained $73 per ounce while palladium has gained $60 per ounce.  In late February palladium was at the $860 level while platinum traded in the $1850 range.