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Pop the Gold and Silver Bubble With ETFs

ZSL, DZZ let you profit when the precious metals fall to Earth


The fever pitch that’s been worked up in the precious metals trading pits over the past several months has been nothing less than astonishing. The price of silver has seen a scintillating surge of nearly 77% in just the past 13 weeks. Gold also has moved higher, although it was a comparatively restrained 15% rise over the same period. In comparison, the S&P 500 enjoyed a gain of just over 5%.

The rise in the precious metals has been driven by a number of factors, not the least of which is the Federal Reserve’s virtual denial of inflationary pressures, and its underlying yet unstated commitment to a continued debasing of the U.S. dollar. We saw that state of denial during Fed Chairman Ben Bernanke’s first-ever post-FOMC meeting press conference last week. In response, silver and gold prices brushed up near historic highs.

The moves been so fast and furious that even bulls are starting to suspect that the bubble is here. Respected analyst Jon Nadler of Kitco Metals recently said that silver has “no business in or near the $50 an ounce region. It has been pumped up to these levels by the funds and I think they might get their hands slapped soon over this one.”

If the shine begins to wear off of silver and gold, smart investors can take advantage of the situation with two exceptional inverse precious metals funds.

Since the action in silver has been more bubble-like of late than gold, let’s start with an exchange-traded fund (ETF) that’s pegged to silver’s decline. The ProShares UltraShort Silver ETF (NYSE: ZSL) moves opposite to silver’s price, times two. Put another way — if silver prices fall 2%, then ZSL should climb by 4%.

Here’s how the legal guys describe it – ZSL is a two-beta, leveraged ETF designed to provide daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London.

The ZSL chart over the past three months shows this fund has been crushed under the weight of the silver bull. But if the bubble does burst on silver, one of the best places you can be is in this leveraged short fund.

As for gold, an easy way to take advantage of a busted bubble in the yellow metal is the DB Gold Double Short ETN (NYSE: DZZ). This index basically moves in opposition to, times two, the spot price of gold, so if gold prices were to sink 2%, DZZ should rise 4%.

Again the lawyers – the DZZ seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return.

Now, keep in mind that DZZ is not technically an exchange-traded fund, but rather an exchange-traded note, or ETN. ETNs differ from ETFs in one major way, and that’s structure. ETNs are issued as senior debt notes by an investment bank. ETFs, on the other hand, represent a stake in an underlying commodity (or basket of stocks). Because of their structure, ETNs are considered prepaid contracts, and that means that any difference between the sale price and the price you paid for the ETN, i.e. any profit you make, can be classified as a capital gain — which must be taken into consideration at tax time.

Forget the lawyers, get an accountant.

If you missed the latest boom in both silver and gold, it might not be too late to make big money in the space. If these two respective bubbles burst, then ZSL and DZZ will be the funds with all of the shine.

As of this writing, Jim Woods held no positions in the funds mentioned in this article.

Article printed from InvestorPlace Media,

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