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

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

silver06032014

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.

silver09072014

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.

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The Impending Inflation That Faces The US Economy

For Gold to cover the amount of Dollars in existence, it would be worth $15,000 per ounce today.
Inflation is not huge in the US at the moment as the inflation is being exported overseas temporarily.
Once people start to realize their purchasing power is being eroded, they will immediately rush into Gold.

The chart below shows the Gold reserves in the US, the monetary base which is the money in circulation and the revolving credit which is the outstanding credit card debt in existence. From the chart it is evident that Gold has a lot of catching up to do in order to cover the amount of money in circulation and the credit card debt in existence.

GoldAccounting090819

The above chart is up until 2008. Since the financial crisis in 2008, the situation has only escalated to unprecedented levels. Look at the chart below to see how much money the Federal Reserve has printed since the financial crisis in 2008.

2008moneyprint

Staggering is the only word I can use to describe the easing efforts adopted by The Federal reserve since 2008. “Gold is worth $15,000 per ounce” states Mike Maloney and he very well may be right in his assumption. He also states that the US presently is “exporting its inflation” but one day when these exported dollars return to the United States, the game will be up.

The US dollar as the world’s reserve currency has an enormous privilege in that it is the bedrock of the world’s financial system. If a poorer country outside the US experiences inflation, it can have a devastating effect on their economy. In my opinion the revolution that took place in Egypt a few years ago was caused by exported US inflation. Food prices rose rapidly and what you must consider is that in a country like Egypt, a family may spend up to 70% of their income just on food so when food prices go up to the point where the people can’t afford to put food on the table, riots on the streets inevitably take place everywhere.

We have inflation in the western world also but on a smaller scale because food probably only makes up 10 to 20% of a westerners income. Nevertheless ,when people start noticing that their purchasing power is decreasing through inflation or any other reason, they will start rushing into Gold. People are not stupid. They have done this for over 2 centuries.

Throughout the last two centuries, people have always rushed back into Gold and Silver whenever a government has increased the money supply too much. This means that throughout history the price of Gold has always been bid up to the same price of the devaluing currency it is priced in.

The risk that Gold technical traders have is that this rush into precious metals may happen when the trader is out of the market. Surprises in bull markets always happen on the upside in bull markets and for this very reason, long term investors always hold their positions even if it means weathering a drawdown lasting years.

My advice is to stay the course. Yes we will have corrections, we may even have manipulation buy Gold prices could spike at any day and if you miss the initial move, you will be chasing for there on. Be patient, ride the bull and stay the course. Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) has shown great strength since May being up over 20% and I believe it would be a great vehicle to ride this Gold bull with.

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The Up-Trend In Market Vectors Junior Gold Miners ETF

Market Vectors Junior Gold Miners ETF
(NYSEARCA:GDXJ) has really moved in the last month or so..It has moved over 20% since the end of May. I firmly believe the bottom could be in in precious metals and we will never visit these levels again for the remainder of the secular bull market. The Fed’s minutes today will tell alot. It will reveal whether this is still manipulation in the market. If you watch the market closely over the last few weeks and months, there seems to be a buyer in the market resisting the manipulation. We may get another attack on the gold market today and it will be interesting to see whether our buyer can resister and overpower the manipulation..

We are definitely due a cycle low in the metal sector. Whether we get it is another thing but we did have a pretty large selling of strength number in Market Vectors Gold Miners ETF(NYSEARCA:GDX). Whichever way it goes, I am still fundamentally bullish in the precious metal sector. In fact a small decline would be health as it would demonstrate that normal cycles are returning something that is badly needed in all markets..

Short term traders have volatility at 40 in (NYSEARCA:GDXJ). Selling puts in here is OK I believe ( 2 to 4 points below the present price 30-40 days out ) as long as you don’t mind getting stock put to you

gdxj11

Silver Standard Resources Inc. (USA) (NASDAQ:SSRI)is another nice miner to trade options off as it has pretty high volatility. It is far less liquid than GDXJ though and can be difficult at times to get out at a price between the bid/ask

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How To Compound Your Money Fast In Investing

Summary

Your brain is your best asset. Invest in it practically by becoming a professional investor and you’ll get rich.
(NYSE:KO) in my opinion is a good candidate for a long term compounding investment.
Investors usually prefer trading to compound investing as they believe compounding as dull and boring but the real reason is that compounding requires hard work. Read here why.

Its no wonder why Einstein called compounding the 8th wonder of the world. Unfortunately though, not enough investors use it in their portfolios consistently. The reason being I believe is that as investors, we believe that compounding is too slow and too boring to adhere to. It sounds fantastic in theory but it takes real patience to be able to stay the course and have your investment portfolio compounding year on year without you doing anything. Compounding is definitely something that Warren Buffet understands and investors should take note of his strategy and his success. Buffet is not a trader, he is a long term investor. He invests in market leaders and holds them, period. Boring?, yes, Dull?, yes but highly profitable.

Lets take a look at a market leader that he has invested in. First up The Coca-Cola Company (NYSE:KO).

ko

There are quite a few reasons why I as an investor would use it as a compounding stock to hold for a lifetime. It has grown in dollar value consistently over the years. Its book value has consistently increased and it is definitely the leader in its market. A dividend paying stock (which incidentally all market leaders are) is also essential. Dividends really help compounding if the dividends are used to buy more stock of the company in question. As you do your own research, you will observe that a lot of the different market leaders out there raise their dividend every year. Again perfect for compounding because even if the stock stays flat, your increased dividends re-invested will really help your compounding efforts.

The one caveat is that you don’t buy the stock in question at overpriced levels. For example, at the moment, the stock market is pretty elevated. We may or may not have a downturn soon but what I’m sure of is that sooner or later, the market will revert to its mean as that’s what it has done throughout history. If you are thinking of buying and holding now, make sure you are buying at the right price. Again, this is unimportant if you really are going to let your investment compound for the long haul but any advantage you can get, you should take it. Investors sometimes wait for quarterly earnings hoping for a drop in the share price before they invest or a downturn in the general market. Either way, these concerns are irrelevant in the long run so don’t get too preoccupied with them

Finally I want to leave you with a point to ponder. I believe that the better investor you are, the less you have to diversify your portfolio. Professional investors (the top 1%) really do their due diligence before they invest in a company for the long term. They meet the management, they look at the cash balance of the company, the book value, the dividend history, they meet customers, they calculate price valuations, the profits, the competition, the growth of the sector and much more. This is what is required to have great success with investing for the long term. A 1% difference in return over a long period of time on an investment turns out to be an absolutely huge difference in money. This 1% is gained by becoming a true professional investor. I urge you to begin walking that path today.

Furthermore when a true professional investor has the opportunity to buy more shares in a company, they don’t hesitate for an instant and they accumulate the shares. This can happen when the stock has poor earnings or when the company makes a tough decision for the betterment of the company, etc. There is no such thing as a risky investment but a risky investor definitely does exist. Professionals minimize risk by doing their due diligence and above all staying the course until their investment flourishes.

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How To Use Options To Play The Precious Metals Bull Market

Includes:AGQ, GDXJ, SSRI, USA

Summary

Options can provide you a consistent monthly income throughout this bull market.
Sell option premium only when there is high volatility in the sector.
Buy option premium when volatility is on the floor as the volatility will revert to the mean.

In the last 12 months, I have enjoyed some pretty rich volatility in the precious metals market and because of this, I have being selling option premium pretty regularly. Unfortunately though in the last 3 months or so, volatility has slackened off a lot and option premium in a lot of stocks and ETF’s doesn’t seem to be there any more. For example, look at the chart below of ProShares Ultra Silver (NYSE:AGQ). Volatility as you can see for the chart has dropped more or less from 80 to 38 in the last twelve months.

agq

Consequently, I am not selling much premium at the moment in the precious metals markets. Nevertheless when good option premiums return, I will begin again in earnest selling put options on some of the more volatile stocks and ETF’s. Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) usually has volatility at around the 50% mark and that is the cut off point at which I sell premium

gdxj1

Also I have done research on Silver Standard Resources Inc. (USA) (NASDAQ:SSRI) and also it has had its volatility consistently over 50% in the last 12 months which has provided me good premium.

ssri

A few points to note. I have no problem selling put options in a bull market because I know if I get exercised on my puts, the bull will rescue me. In saying that, I only sell put options when I receive a fair price for the put and also you must be careful how may put options you sell at any one given time as you must ensure you have the available capital if multiple stocks get “put” to you. Secondly if you are an inexperienced investor, I would advise against selling options on leveraged products as the risk is far greater and your broker will use a far greater percentage of your buying power compared to trading a normal stock or ETF.

Finally if your directional bias is bullish, instead of selling put options on an underlying, you can buy call options. If volatility gets really cheap, the risk/reward trade definitely favors buying options instead of selling them. Options very much like stocks in that they eventually revert to the mean. If the volatility of a particular underlying is on the floor, the chances are that the volatility of this underlying will soon increase which will subsequently increase the option premium. In an event like this, it would be better to buy the call option and wait for the premium to increase. The only disadvantage with this strategy is that you are spending money initially to make the trade compared with selling an option which pays you money straight into your brokers account.

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Precious Metals Finally Bottomed

From the action we had yesterday in the precious metals market, I believe Gold has finally bottomed. Even though the miners gave up a lot of the gains from yesterday, the volume in the mining sector is unprecendented. When you look at the leveraged ETF “NUGT”, its volume really spiked on the 19th of this month.. It is very rare when you see large increases in volume in an ETF, for the sector to turn over..

I believe the bottom is in and that we will see generally higher prices in the next few months…

Good Candidates to trade are

Market Vectors Junior Gold Miners ETF
(NYSEARCA:GDXJ)

ProShares Ultra Silver (AGQ)

ProShares Ultra Gold (ETF)
(NYSEARCA:UGL)

Global X Silver Miners
(NYSEARCA:SIL)

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Own Hard Assets to Protect Against Potential Inflation

Hard Assets have always protected one’s purchasing power throughout history..

The real big gains will come in precious metals when it moves from being a commodity to a currency. Gold has always been known as real money and was thought of as real money until president Nixon took the dollar off the Gold standard in 1971. Up to that point, there was the same.amount of dollars in circulation as gold. The currency was “backed” by gold meaning that for every new dollar bill created, there would need to be an equivalent dollar value of gold placed in a vault to ensure the dollar bill had intrinsic value.

How the situation.has changed since then. Since 1971, money became fiat or “paper”. The money system today is based on nothing. There is nothing physically backing the currency. The only thing that gives our fiat currency value now is trust in the system. Person A trusts that Person B will give him goods and services for his paper.

Throughout history, hard assets have always kept their value in times of economic turmoil. When you take notice of how much the Federal reserve has increased its balance sheet through “quantitative easing” in the last 6 years, you start to realise that there are major financial problems in the world at the moment.
When you see what happened in Zimbabwe, in Wiemar Germany, inflation has always occurred in the world when central banks printed money. Deflation is the central worry for central banks as it is impossible to have growth in periods of high deflation. Consequently, central banks attempt to stall the deflation through a variety of programs. We have seen a tranche of measures in the US since 2008 including but not limited to short and long term bond purchases, loans to banks to encourage lending, etc. Europe is nearing 0% interest rates and as of yet, has not been as aggressive in combating its deflation as the US but may have to take more drastic measures soon as European deflation increases.
As an investor though, here is what you must remember. The world’s financial system is operated through the Fractional Reserve System. What this means is that money can be produced out of thin air in any instant. When a bank loans out money that it doesn’t have, they are creating money. Interest is another form of money creation. When you use your credit card, you are creating money. Therefore in theory, the more money that is created over time, the less valuable the same money should be when inflation kicks in.

To sum up, I would strongly suggest investing some of your cash into hard assets. Assets such as Gold, Real estate, Commodities, etc. Remember, when you are holding cash, you are holding a currency, not money. All currencies have a shelf life as they are designed to lose value year on year. Yes, we may have deflation in the short term, but inflation is a certainty over the long term. “Cash is Trash” says Robert Kiyosaki when he explains that a currency can become worthless but a hard asset never can..

So as investors how can we play a big spike in inflation in the future?. Well we can short the dollar PowerShares DB US Dollar Index Bullish (NYSE:UUP) or go long some commodity ETF’s such as SPDR Gold Trust (ETF) (NYSE :GLD) or United States Oil Fund LP (ETF)(NYSE :USO). Since these commodities are priced in dollars, the dollar price of funds like these will invariably rise if the dollar index falls in value..

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How Do You Make A Living Trading?

If you want to make a living trading, there are a few things that you must consider. To make a living from trading, you obviously must earn a salary every month. Obviously to earn a salary, you must be profitable in your trading. To be profitable, you need to

1) Trade very small. One trade should be no more than 1$ of your account.
2) Trade often. To have the probabilities work in your favour, you need to trade a lot.
3) You need to trade stocks/etf’s which have high volatility.

Lets go through the 3 of these points in succession. Firstly and I think this is the most important. If this is going to be your business, your livelihood, you cant take too much risk on any trade no matter how confident you feel on the trade. One big losing trade could close your business and have you going back to the J.O.B. Don’t let this happen to you.

Secondly as we are going to trade small, we need to trade often. We are never going to hit a home run. Our strategy is small winning trades – could be as high as 80% and also small losing trades. We are never to be right on all on trades but at least, when we lose, we wont lose big. It goes back to the law of numbers. We are working with probabilities here. We place high probability trades which are very small. The probabilities will only work out if we place enough trades so trading often ( and investing the time to do this..) is essential..

Finally is the whole topic surrounding volatility. When volatility is high like over 50%, we can get further out from where the stock is trading. When you can get further out on anything like a naked put or call, credit spread, strangle, etc, your probability of success on that trade is far higher. If you sell premium on low volatility stocks, the probability is far less that it will end up being a winning trade..

Finally and this is very important. If you are going at this 100% and want to make a living from this, then we should do everything in our power not to take hold of stock. If you get put stock for example, you may have to wait months or years for this stock to be profitable again. Yes, you can sell covered calls, etc but your buying power also will be reduced dramatically when taking hold of stock..

When treating this as a full blown business ( Day Trader), we are not interested in stock. Do whatever you can not to take hold of stock. Roll your positions or take the loss. As a trader you must protect your buying power and the only way to do this is to constantly trade options. Trade small, trade often and trade vehicles with high volatility..

If you do this – then the probabilities will be in your favour and you will make money. The more often your trade, the more winner you should have..

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Define Your Risk With Credit Spreads

Instead of selling a put or call, one can sell a put spread or call spread. A put spread is selling an out of the money put whilst also buying and put further out the money. You receive a premium as the sold premium has more premium in it that the bought put. So for example, if you sold a put spread for $0.3, you would receive $30 premium for your sold spread. This is your maximum profit potential but the advantage of a spread over a naked put is that your risk is defined. The maximum you can lose here is $70 ( assuming that the width of the strikes is $1 )

Is this a better strategy than selling a naked put ? – it depends. There are a few disadvantages. Less profit potential – more commissions as each spread is treated as 2 trades. However the main advantage is that your maximum loss is defined so you are never going to be wiped out if you trade credit spreads – that’s for sure..

The combination of a put credit spread and a call credit spread is called an iron condor. This is a neutral strategy. You keep the premium collected if your underlying stays between both short strikes at expiration. For example ABC trading at 50. You sell the 45-44 put spread and the 55-56 call spread. If ABC is trading anywhere between45 and 55 at expiration – you keep the entire premium collected.

I recommend strategies like this to the person starting out in investing. Also one can “leg into” iron condors instead of opening up the whole trade at the start. So back to our example, instead of selling the call spread at the start, you can wait. Then if your put spread gets tested ( underlying started to close in and maybe breach 45 ) you can then sell a call spread at maybe 51-52. This will bring in more premium on the call side helping out your tested put side..

This is how professionals trade. They are always changing positions to ensure they don’t get exercised. The same principle can be adopted with strangles ( sold call and sold put). Again you can leg into a strangle by waiting until your sold call or put is tested. Professionals constantly bring in premium but stay far away from the underlying. Again with strategies like this, it is better to have a lot of volatility so you can get further away from the underlying..

Credit spreads and iron condors are a good way to start out to ensure you understand the game…

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