Leveraged Gold and Silver ETFs: Sideshow or Real Market Movers?

Includes: AGQ, GLD, GLL, SLV, UGL, ZSL
by: Richard Bloch
Mike Merrill, an active member of the Seeking Alpha community, asked me whether I thought the ProShares UltraShort Silver (NYSEARCA:ZSL) ETF could impact silver prices.

I'm hearing now about how the Ultra-Short Silver funds have had a huge inflow of money ... if silver breaks above 50, could these ultra-short positions cause (or contribute to) a short squeeze if silver moves higher?"

Just to recap, ZSL is a 2X leveraged ETF designed to track twice the performance of a short position in silver on a daily basis using the spot market price for silver as a benchmark.
But there’s also another 2x ETF, the ProShares Ultra Silver (NYSEARCA:AGQ) ETF that delivers twice the daily position of a long position in silver.
Both funds use the spot price of silver as their benchmarks. The funds essentially “reset” every day so holding an ETF like this for more than one day can easily generate tracking error. That’s why I suspect most traders are using them as either daytrading tools or for very short-term trades.
There are also two similar ETFs for gold, the ProShares UltraShort Gold (NYSEARCA:GLL) and the ProShares ProShares Ultra Gold (NYSEARCA:UGL). From the data I looked at, trading in the leveraged silver ETFs is a lot more active than for those gold funds.
Let’s look at silver first.
Silver: Enormous Surge in Leveraged Trading
Here’s a chart showing the daily dollar volume for the iShares Silver ETF (NYSEARCA:SLV) and the two leveraged ETFs from June 2010 through February 2011. Daily dollar volume is simply the closing price multiplied by the number of shares traded. It’s kind of approximate because few shares trade at exactly the closing price.
As you can see, trading in both leveraged ETFs has increased over the past several months, which corresponds to more trading in SLV.
If I extend the chart to April 28, however, you can see an even more dramatic surge in ETF volumes.

But the interesing thing to note is that dollar volume for the 2X long silver ETF (AGQ) is much higher than for the 2X short ETF (ZSL).
To see that in a bit more detail, here’s a chart showing the pecentage of dollar volume for both AGQ and ZSL as compared to SLV.
What this chart shows is that the dollar volume of trading in both leveraged silver ETFs has ranged from about 20% to 30% of the dollar volume of SLV, but that most of that volume is for the 2X long fund (AGQ).
The thing is, you can short an ultra long ETF, at least in theory, so some of that volume could be from traders betting on a short-term correction.
Gold: Leveraged ETF Trading Subdued
Compared to silver, traders don’t seem to be flocking to the leveraged gold ETFs with nearly the same enthusiasm.
This chart represents the dollar volume for the SPDR Gold Shares ETF (NYSEARCA:GLD).
Trading in the 2X long gold ETF (UGL) and the 2X short gold ETF (GLL) barely registers in comparison so I didn’t even bother to show it.
But here’s a chart showing the percentage of dollar volume of both leveraged gold ETFs compared to the dollar volume of GLD.

Trading in both leveraged funds amounts to only about 1.5% of the dollar volume of GLD.
So back to the original question: Could ultra-short positions cause a squeeze for silver – or for that matter, gold? I don’t think so. I consider these leveraged ETFs to be mostly an interesting sideshow.
You could even say the GLD and SLV ETFs themselves are sideshows, because if there’s a short squeeze, I’m betting it’s more based on the scarcity of silver in deliverable form than on anything else.
Thanks for question Mike. I never would have thought of looking into this without your suggestion.
Disclosure: I am long GLD, SLV.