How To Jump On The Coming Silver Bull

Includes: AGQ, SLV, USLV
by: Individual Trader


Silver is very near completing its decline, so buckle up and position yourself accordingly.

IShares Silver Trust is the biggest ETF in this space and perfect for investors seeking liquidity.

Proshares Ultra Silver is my option. This vehicle will move at double the standard silver move and is liquid enough to trade.

I believe there are two ways one can play this trade without taking too much risk. First, one could, of course, buy call options which would give one massive leverage -- but the problem with options is that eventually they expire worthless. Second, if one is on the wrong side of the trade, one loses 100% of the investment. Options are designed for traders who have a good idea of short-term expected moves, but for the most part buying out-of-the-money call options is the same as gambling. So I would advise staying away from those types of trades, no matter how tempting they may be. Marc Faber said, "I will never sell my gold," which typifies the confidence he currently holds in the precious metals market.

Here are the two ways one can play this. First, one can buy iShares Silver Trust (NYSEARCA:SLV), which tracks the price of silver bullion. Similar to its gold counterpart, SPDR Gold Trust (NYSEARCA:GLD), this fund claims to hold the physical asset in its vaults for security. This fact pleases investors as one is assured that the investments are backed by the physical asset. iShares Silver Trust has massive volume and excellent liquidity, but it will move the exact same as the underlying commodity minus expenses and fees. This investment is very similar to buying physical silver, except one is paying this fund (through expenses and fees) to store the bullion. The advantage here over physical is that one can trade it, so one can get out quicker when one believes the time is right.

The second way to ride this bull is through the leveraged ETF Proshares Ultra Silver (NYSEARCA:AGQ). This fund, which is a leveraged fund, moves twice as much as iShares Silver Trust and also has good volume, with trading consistently topping 1 million trades a day. One must be careful here as this instrument is a speculative ETF. Consider for a moment a $20,000 investment in iShares Silver Trust or a $10,000 investment in Proshares Ultra Silver. If, for example, silver doubles in price that would mean iShares Silver Trust would double to $40,000 and an Proshares Ultra Silver investment would quadruple to the same amount -- $40,000.

It is evident here that one only needs to put up half the capital in Proshares Ultra Silver as opposed to the full amount of Shares Silver Trust. This is a distinct advantage as the saved capital can be deployed elsewhere in your portfolio. Another advantage of the leveraged ETF is one can only lose what one has invested. Since one is investing less, one has less to lose -- which I believe is a distinct advantage.

On the flip side there are many disadvantages with the Proshares Ultra Silver trade. Leveraged ETFs are not designed for long-term trades. The reason is that they decay over time. They are a little like options in this regard in that the longer one holds on to them, the more decay the fund will experience. All this means is that the performance of the ETF decreases over time. One will not achieve the stated 200%, but rather something like 180% -- depending on how long one holds the investment for. Another big disadvantage of leveraged ETFs is that your losses will quickly accumulate when the trade goes against you. Using leverage on margin is a recipe for disaster and could easily wipe out your account. If one doesn't have the appropriate risk management skills, then Proshares Ultra Silver is definitely not for you.

Nevertheless, Proshares Ultra Silver is a attractive vehicle when the underlying silver is coming out of an intermediate bottom. I believe this is happening now with silver. I think the time is rapidly approaching when silver will bottom and start producing big gains again like it did in 2011. Silver almost reached $50 per ounce back in 2011 but has come all the way back to under $21 an ounce as of the time this was written in June 2014. However, after observing record volume recently in the mining sector, I believe silver is now set up to charge higher from here.

Finally, I want to bring your attention to a third way to play this through Credit Suisse AG - VelocityShares 3x Long Silver ETN (NASDAQ:USLV). This ETN actually moves three times as much as the underlying silver price. Nevertheless, this particular instrument has major drawbacks. The spread is too wide, the volume is too thin, and it is impossible to get out at the price point you want, so I wouldn't recommend it.

In times of economic turmoil like we have in the world right now, investing or owning hard assets is vital. Silver is a vital investment in your portfolio going forward.

Disclosure: The author is long AGQ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.