I have been an analyst writing articles on Seeking Alpha for almost three years now. I have written over 100 articles on precious metals during that time, have over 4000 followers, have average page views exceeding 10,000 per article, and have been in the top 5 for metals analysts for most of my three years on Seeking Alpha. I also run a Trading Room at Elliottwavetrader.net, with over 700 traders in the room on a daily basis, and have several staff analysts focused on precious metals. So, I have a lot of experience in trading and investing in precious metals.
While almost all my articles have been focused on the direction of the metals, I decided I needed to write an article about something that has bothered me for a very long time. I have kept silent about this issue for quite some time, but I feel the need to write a dedicated article, since I feel it is so important for all long term investors.
DGP, UGL, AGQ, DUST, etc . . . we all know these vehicles. But, do you know how they make or lose money? I would imagine too many of you have been terribly hurt, and will continually be hurt if you do not understand the nature of leveraged ETF's and the use thereof.
What makes matter worse is that I have read countless articles from many other metals analysts during my almost three years here at Seeking Alpha, and am continually shocked that so many of them have suggested these leveraged ETF's as a way of "investing" long term in the precious metals. Sadly, it seems that many do not understand the appropriate use for those instruments, even though they have suggested it to their readership, so allow me to enlighten you in as strong language as I possibly can:
Any leveraged ETF is purely a trading vehicle and should never be used as an investment vehicle. And, yes, I will repeat the main point: Leveraged ETF's should never be used as an investment vehicle.
As we all know, Seeking Alpha caters mostly to long term investors. In having the privilege of interacting with so many of you over the years, it is abundantly clear that most of you who read the articles here have very long term horizons in the metals. Additionally, it is clear that many of you are not even concerned about the 50% drop in prices in silver over the last three years (unless you had your money in AGQ), which, personally astounds me. But, it is something that I have come to clearly recognize.
So, it leaves me scratching my head as to why analysts and investors with very long term horizons even consider using these leveraged ETF's. Well, not really. It is clearly because they feel that their money will be "supercharged" when the metals move as we all know they can. They simply assume that as long as the metals move up, their investment will move up twice as much. But, do the metals always move up every day? And, do these analysts and investors really understand how these leveraged ETF's work?
Since I do not need to reinvent the wheel, I would suggest each and every one of you that have even considered a leveraged ETF read this article written by Sammy Pollack.
As an example, assume someone had bought $100,000 of AGQ at its split-adjusted highs over $760, they have now lost approximately 90% of their initial "investment" over the last 3 years. And, no, that is not the worst of it. I am sure they are now still holding this instrument and thinking that as soon as silver gets back to its highs in the 50's, they will make their money back. But, sadly, the truth is that, depending on how strongly silver rallied back to its prior highs, it would have to easily exceed $75 before that investor would even approach their initial invested value. Yes, silver would have to rise to at least 150% of its prior highs before that investor would even approach breaking even.
While I know this is a worst case scenario, and based upon a very simplistic estimation (which assumes AGQ will double for each 50% rise in the underlying metal), I hope it highlights how poor a long term "investment" AGQ would be for all metals investors.
And, since I know that most of you are not reading Seeking Alpha to trade precious metals, then you should not be putting your money into a trading vehicle if your sole purpose is investing. Remember, leveraged ETF's are trading vehicles only. And, anyone that would suggest you put your "investment" capital in a leveraged ETF should automatically be discounted.
So, I beseech of each and every one of you to please learn about how these leveraged ETF's work before you even consider placing any money in them.