Gold, Silver Funds Pullback to Oversold Levels
Full disclosure: buying and holding leveraged exchange-traded funds (ETFs) is a recipe for underperformance relative to the underlying asset.
The mechanics – and mathematics – of why this is so are a little long-winded. But suffice to say that many of the dangers that traders and active investors often see when it comes to the world of leveraged ETFs have to do with longer-term investing in leveraged funds. Leveraged funds are built for short term trading, where the effects of daily rebalancing are minimal. And when handled properly, leveraged ETFs offer fewer challenges and more potential opportunities for the average trader than many might think.
Leveraged ETFs, particularly leveraged ETFs in the precious metals sector, have some of the biggest edges in the market right now. This is due to sharp pullbacks in both gold and silver. Gold has closed lower for five out of the past seven trading days, while silver dropped by more than 1%, finishing lower for a third day in a row and six out of the last seven.
This weakness has given positive edges to a number of precious metals related funds that track the dollar prices of gold bullion and silver rather than the share values of gold and silver mining stocks. These ETFs include the ProShares Ultra Gold ETF (UGL) and the Deutsche Bank Gold Double Long ETN (DGP), as well as a leveraged fund dedicated specifically to silver: the ProShares Ultra Silver ETF (AGQ).
Shares of UGL and DGP both pulled back by more than 5%, finishing lower for a second day in a row and very oversold. AGQ endured a far more significant correction on Thursday, dropping by more than 13% to close down for two sessions in a row.
The ProShares Ultra Gold ETF is leveraged two-to-one to the daily performance of the dollar price of gold bullion, while the DB Gold Double Long ETN is is leveraged to twice the daily performance of the Optimum Yield Gold Excess Return of the DB Liquidity Commodity Index.
AGQ is leveraged to daily performance of the price of silver bullion, also on a two-to-one basis.
Remember that when trading leveraged ETFs, reducing position sizes proportionately is one way to avoid having more than typical exposure to any one fund or market (i.e., trading half a stanard position size with a 2x ETF, etc.).
All of the exchange-traded funds (ETFs) in today’s report were available from research and data available through The Machine. To learn more, click here.
David Penn is Editor in Chief of TradingMarkets.com