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Why Silver's (NASDAQ:USLV) Is A Terrible Long Term Hold

|Includes: VelocityShares 3x Long Silver ETN (USLV)

Do not hold (NASDAQ:USLV) for more than 3 months as you will inevitably experience big decay.
If you want to hold Silver indefinitely (NYSE:SLV) is the best play in the markets.
Nevertheless ProShares Ultra Silver (NASDAQ:AGQ) & (NASDAQ:USLV) are favored for investors who like to trade short term plays.

Credit Suisse AG - Velocity Shares 3x Long Silver ETN (NASDAQ:USLV) is an instrument that is long 3 times the price of Silver. When Silver goes up fast, this instrument can give you fantastic returns in a short period of time but when Silver goes through a period of stagflation, is a terrible investment. Lets look at why this is the case.

I use only to trade short term. On March 6th 2014, I sold out of for a nice short term gain of 6% as the trade was held for a week or so. The price at which I got out at was $59.46. Let's look at the Silver price on that date

As we can see from the chart, Silver's highest price on March 6th was $21.61 per ounce. Therefore we can deduce that on March 6th 2014, Silvers price of $21.61 equated to $59.46 in .

Lets fast forward to the 9th of July 2014. As we can see from the chart below Silvers highest price on this day was $21.21 which is 1.85% lower than what it was on March 6th 2014.

Since supposedly moves 3 times in accordance with the Silver price, should be in the region of 5.6% lower than what it was trading back on March 6th. As it turns out, the highest price at which traded on the 9th of July was $54.30. This is a whopping 8.67% below its price in March illustrating decay or slippage of more than 3% in 4 months.

This example illustrates that is a terrible long term hold. This fund is designed to lose value in the long term fleecing investors along the way. Investors are attracted by the supposed leveraged returns but these returns are only realised in short periods. The minute Silver stagnates , this funds starts to lose its value very quickly.

Therefore if you want to hold Silver long term without holding physical (NYSE:SLV) is the preferred choice as the fund loses very little over long periods of time. Lets look at this fund to see what levels of slippage are evident over a similar 4 month period. On July 9th 2014 highest price was $20.37 whilst Silvers highest price was $21.21 meaning 1 share of gave you 96.03% of an ounce of Silver . On March 12th this year, highest traded price was $20.61 whilst Silvers highest price was $21.40 so one share of gave you 96.3% of an ounce of Silver which equates to roughly slippage of 0.27% in 4 months - more than 10 times less slippage in the same timeframe compared to !!

Nevertheless for short term directional plays, and ProShares Ultra Silver (NASDAQ:AGQ) are excellent candidates. Leverage is a double edged sword, it can make you rich or it can bankrupt you. If I had a short term view of the Silver market, I always favor these instruments over buying call options. All options expire worthless so if your trade goes against you, you could lose 100% of the capital invested. On the contrary, with the leveraged instruments, you own something and you wont ever lose 100%. Yes your losses will be magnified but you wont lose everything. You must keep your position size small to ensure you can stay in the game until you learn how to truly trade these powerful instruments.

Disclosure: The author is long AGQ.