Long Gold Or Short The UltraShort?

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 |  Includes: FAS, FAZ, GLD, GLL, SLV, ZSL
by: David Ristau

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Market Opinion: The market rally has very little upside with the constant threat that Greece could fall out of the EU. Fortunately, we had a good jobs report as unemployment came down marginally. Due to EU uncertainty, a great investment vehicle to bet on is gold ... or perhaps shorting the inverse of gold?

Daily Data: Proshares UltraShort Silver and Gold (ZSL, GLD)

Lately, I’ve been paying attention to bearish leveraged ETFs. I logged onto the Proshares (ETF provider) website last Monday and began researching their worst performing ultra ETF’s since inception. I found that both the Ultrashort Silver (NYSEARCA:ZSL) and Gold (NYSEARCA:GLL) ETF’s are down -76.64% and -48.35% since inception (Jan’09). So I decided to dig further into the data since the forecasted long term trend in silver and gold seems to remain up, implying the long term trend in these leveraged ETF’s on the metals is probably down.

Let’s begin talking about ProShares UltraShort Silver (ZSL). The data listed below uses the adjusted prices (taking into account dividends and splits) of UltraShort Silver. The monthly returns are non cumulative and are based on a time frame of one option expiration date to the next.

The information above it tells us the following:

1. Max Monthly Gain since Inception = 30%

2. Max up over 2 month period = 35%

3. Max up over 3 month period = 20% (implies we should sell the Jan’12 17/18 call spread)

4. Max up over 4 month period = 10% (implies we should sell the Feb’12 16/17 call spread)

5. Max up over 6 month period = -3% (implies we should sell the May’12 15/16 call spread)

6. Max up over 12 month period = -47%

It’s important to note that the max up was calculated by assuming that we entered the stock in any/every 2/3/4/6/12month period possible and then we found what the max return possible was during that period.

In conclusion if there are many months of contango in silver futures as well as a bullish outlook for silver, then we should definitely sell call spreads or go short ZSL stock. I find it interesting that the maximum monthly gain of 30% occurred in 2009 not 2011. Ironically the max monthly gain did not occur last May when silver dropped from around $42.50 to $35 during the period, but instead it was back when the bull market first started in early ’09.

Now let’s take a look at the adjusted price performance in the UltraShort Gold ETF (GLL). The data below was calculated in the same way as ZSL.

The information above it tells us the following:

1. Max Monthly Gain Since Inception = 19%

2. Max up over 2 month period = 24% ... probability that GLL will be trading lower in 2 months after expiration closing price = 79%

3. Max up over 3 month period = 9% ... probability that GLL will be trading lower in 3 months after expiration closing price = 87.5%

4. Max up over 4 month period = 7% ... probability that GLL will be trading lower in 4 months after expiration closing price = 90%

5. Max up over 6 month period = 2% ... probability that GLL will be trading lower in 6 months after expiration closing price = 97%

6. Max up over 12 month period = -33%

In conclusion GLL seem less volatile due to the nature that gold was neutral to bullish since the inception of this ETF. We would like to initiate bear call spreads or short this ETF as we feel gold will remain neutral to bullish. We would also like to see the futures market in contango over the long term to help devalue this ETF. It is worthy to note that the max up rarely occurs. For example: the max up for GLL during a three month period is a historical probability of 3%. On a final comment: during the same time period of ZSL and GLL, SLV and GLD vastly outperformed them.

We will see however in a later article that shorting an inverse ETF without a pair (such as shorting both FAS and FAZ) trade can be disastrous in an equity downtrend. However, if gold is going to increase over time investors can make more money shorting GLL than buying GLD.

Disclosure: I’m short shares of ZSL, GLL, I own bear call spreads on ZSL and GLL.

Disclosure: I am short ZSL, GLL.