ETFs to Consider in Case of a Silver Blowoff

Includes: AGQ, DGL, GLD, GLL, SLV, ZSL
by: Michael James McDonald
I recently wrote an article on how to use the ProShare Ultra ETF data to help locate market tops and bottoms. It is also apparently useful in helping to analyze where gold and silver are going.
The Proshare Ultra ETFs are double index funds – they try to get twice the volatility that just the index would give. There are two Ultra ETFs -- long and short -- that apply to gold and silver.
The bullish double gold ETF has the symbol DGL, while the double short gold ETF has the symbol GLL. The double silver ETF has the symbol AGQ, while the double short silver ETF has the symbol ZSL. These ETFs are used by aggressive speculators who like to go both long and short. As such, they could be good at helping establish when investors are getting too one-sided in their positions.
Proshares publishes on a daily basis the number of shares outstanding on each of these ETFs. Multiplying these by the price of the shares shows how much money is long or short both gold and silver. The two charts below show the ratio of bullish and bearish assets in these Proshares plotted against the silver and gold ETFs GLD and SLV.
[Click all to enlarge]
We can see from both charts that peaks in the price for both gold and silver occurs when there is a lot more money in the bullish ETF than the bearish ETF. Likewise, price lows occur when the ratio is low, i.e. when more speculators are moving into the bearish ETF.
The high and low ratios are different for each metal, but I think we can say that when there is four times more money in the bullish ETF than the bearish one, for gold, that has represented a local peak in price. Right now the ratio is three times.
The silver ratio shows eight times more money in the bullish ETF compared to the bearish ETF. This is a record level. I believe we are witnessing silver beginning to form into a "buying climax." A buying climax is a very short but extremely rapid price rise that occurs at the end of a major move. Prices will quickly double in value in just a few days, then reverse just as quickly, giving it all back.
Gold, on the other hand, looks more subdued. It will be important to watch these ratios over the next month to see if they go extreme and we do go into a price blow off. I’ll publish this chart every Thursday for the next few months to keep an eye on what they are saying.
Disclosure: I am long SLV.