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Picking The Right Silver ETF

Summary Those who consider investing in silver could consider using silver ETFs. The major ones follow the price of silver by stocking up on the precious metal. Other ETFs and ETNs follow silver by using forward contracts. The silver market has seen better days, but some still think silver could recover in the coming years and reach its former glory. The main idea in investing in silver is either for hedging purposes or for those who think silver will go up in the future. Let’s quickly examine the developments in the silver market and the main ETFs representing it. Up to the beginning of 2013, the rising demand for silver was fueled by people and institutions investing in silver via, among other ways, silver ETFs , in part, due to growing fear of a possible spike in inflation driven by the Federal Reserve’s monetary policy – mostly consistent of near zero interest rates and quantitative easing — and the devaluation of the U.S. dollar. These fears haven’t materialized, up to now. In fact, inflation has come down in past year and the U.S. dollar has appreciated against major currencies. The slowly recovery in the U.S. economy, the shift in the Fed’s policy, rise in mine production and little change in silver demand in the industrial sector drove down silver prices in the past few years. Some still expect the silver market to recover in the coming years on account of growing demand for silver in the industrial sector or slower growth in production (on account of the current low prices). Others may need a silver financial instrument to hedge their silver inventory. One way to take a long or short position on silver is via ETFs. Why choose silver-focused ETFs over other available silver instruments? The other possibilities include buying physical silver, silver contracts or silver companies. Buying a stock of physical silver, especially for speculators, may not be the best options. Silver companies are also one way to go long on silver. In this category, investors could pick silver producers such as Pan American Silver (NASDAQ: PAAS ) or silver streaming and royalty companies such as Silver Wheaton (NYSE: SLW ). But there are three issues to consider: These companies may incur risk that isn’t related to the movement in the price of silver such as growing debt and cash flow strain; Silver companies don’t only focus on silver (after all silver is usually a byproduct of other metals); they also have other metals in their portfolio – in most cases gold and copper – and as such bullion companies’ stocks aren’t only impacted by the movement of silver prices. For the most part, silver is strongly correlated to gold, but this relation isn’t consistent over time; The stocks of silver companies are also affected by these companies’ growth in operations (or lack of it); so if they expand their business — stocks tend to rise and vice versa. This is another variable, which isn’t necessarily related to the changes in the price of silver. These issues don’t mean the option of going with a silver company isn’t a good play, but it may not suit your investment needs. With that said, let’s review some of the available silver ETFs for hedges, investors and speculators and the main difference among the ETFs. Investors that have a long term investment horizon wishing to go long on silver or those that need a hedge for the future price of silver — if for example you plan to purchase silver for your business (e.g. for industrial usage) at a later date and need to lock the current price of silver to avoid risk related to fluctuations in the future – could consider the iShares Silver Trust (NYSEARCA: SLV ). This is also the largest traded ETF in this space with a market cap of $4.8 billion. The ETF follows the price of silver by holding the precious metal – as of September 24, the ETF holds 318.2 million ounces. The only caveat is the management fee, which is 0.5%, one needs to pay for holding this ETF. And just in case you were wondering, since this ETF holds physical silver and doesn’t buy future contracts each month – as oil and natural gas ETF tend to do – there is no Contango or Backwardation that lead to roll decay to worry about. Another ETF that follows silver in the same way as SLV is Physical Silver Shares (NYSEARCA: SIVR ), which has a slightly lower management fee of 0.3%. But the ETF is also smaller with a market cap of $280 million and 18.4 million ounces of silver. For speculators with a short term trading horizon (usually daily) and suspect the silver market is heading up may consider ProShares Ultra Silver (NYSEARCA: AGQ ). This ETF follows twice the daily return of the silver. For those who think silver is heading down may use ProShares UltraShort Silver (NYSEARCA: ZSL ), which follows twice the inverse return of silver. Both of these ETFs use silver contracts (forwards) and don’t buy silver bars. Therefore, these ETFs may face roll decay issues related to Contango/Backwardation. These ETFs also have a compounding issue that affects the returns of investments (e.g. if the price of silver rises by 10% in the first day and another 10% the next day, then the total gain is 21% due to compounding). That’s why these investments are mostly for short term investments. It’s also worth mentioning that besides ETFs there are also Exchange traded notes or ETNs . ETNs are structured products issued as senior debt notes. They are based on the future contracts. ETNs are highly volatility, tend to be riskier than ETFs (due to debt risk), and are mostly considered for short term holdings. For a leveraged long silver position, the VelocityShares 3x Long Silver ETN (NASDAQ: USLV ) offers three times the daily return of a silver index (S&P GSCI Silver Index ER). For those seeking to go short over short period of time, VelocityShares 3x Inverse Silver ETN (NASDAQ: DSLV ) is one way to go. Since these ETN are leveraged, they also have compound issues as listed above for ZSL and AGQ as well as Contango/ Backwardation issues. It’s also worth reading these ETNs prospectus to get a better sense of their risks ( pdf ). These ETNs are also very small cap and may include a liquidity issue. The following table summarizes the possible ETFs and ETNs that are currently available with market share and fees. (click to enlarge) Sources: ETFs’ and ETNs’ websites. The above ETFs and ETNs offer an array of investment possibilities for investors, day-traders and hedgers. Based on your needs and outlook, you could utilize the above-mentioned financial instruments. (For more please see: ” Will Higher Physical Demand for Silver Drive Up SLV? “)

Wheel Of Fortune?

The only thing we can control is ourselves. True happiness comes from inside. In the same way, investors can’t control the circumstances of the market or the global economy. Market prices are always fluctuating. But they can control the quality of the securities they hold. Circumstances may be volatile, but economic values don’t change all that much. Where are you on the wheel of fortune? When I was growing up, one of the most popular TV game-shows was “Wheel of Fortune.” Contestants would solve a word puzzle similar to “hangman” and spin a giant carnival wheel to win cash and prizes. The show has run for over 30 years. Its appeal is that it encourages viewers to play along – to try and guess the mystery phrase before the contestants. But before there was a TV show, there was another wheel of fortune, or rota fortunae . It’s a concept from ancient and medieval philosophy that characterizes fate, or chance. The goddess Fortuna would spin the wheel at random, changing the positions of those on the wheel. Some would suffer misfortune, others would gain windfalls. Fortune herself was blindfolded. The concept has come down to modern culture, although Fortuna is sometimes replaced by Lady Luck. Jerry Garcia co-wrote “The Wheel” and performed it with the Grateful Dead in the ’70s and ’80s. In the TV series Firefly, the main character notes “The Wheel never stops turning” several times. It’s important for investors to understand the role of fortune in their portfolios. The investment world is not an orderly and logical place. Much of investing is ruled by luck. Every once in a while, someone makes an outsized bet on an improbable outcome that ends up working out and ends up looking like a genius. But whether a decision is correct can’t be judged just from its outcome. A good decision is one that’s optimal at the time it’s made, when the future is unknown. A good decision weighs the probable outcomes and measures potential risk and reward. In the sixth century Rome, philosopher Boethius was awaiting trial – and eventual execution – on a trumped-up charge. While in prison, he reflected on how to be content in a world beset by evil. He concluded that current conditions are always in flux – rolling on the rim of the Wheel of Fortune. The only thing we can control is ourselves. True happiness comes from inside. In the same way, investors can’t control the circumstances of the market or the global economy. Market prices are always fluctuating. But they can control the quality of the securities they hold. Circumstances may be volatile, but economic values don’t change all that much. The Wheel of Fortune is always turning, lifting us up or taking us back down. Bad things can happen to good companies. We need to look inside what we own to see what our investments are really worth. Share this article with a colleague

Buy The Fourth Quarter Of The Third Year Of The Presidential Cycle

The best time to buy the Presidential Election Cycle is from September of the second year to April of the third year. Nevertheless, the fourth quarter of the third year is strong, particularly after a weak third quarter. In the past, it was better to buy near the end of October than at the end of September. How does the fourth quarter do in the third year of the Presidential election cycle? ‘Everyone knows’ that the third year of the Presidential cycle is incredibly reliable, and has returns that far exceed the other three years. Even Grantham has touted it, which I thought must be tongue-in-cheek, because he is a macro-guy. So I decided to go back and check, and found his letter written at the end of the third quarter in 2014 for GMO. It turns out he was quite serious. Regular readers know the score: +2.5% a month for the seven months from October 1 to April 30, in year three on average since 1932 (a total of +17%). This is now the 21st cycle. The odds of drawing 20 random 7-month returns this strong are just over 1 in 200 according to our 10 million trials. But 17 of the actual 20 historical experiences were up, and the worst of the 3 downs was only -6.4%, so the odds of this consistency plus the high return would be much smaller. The remaining 5 months of the Presidential year have a good but not remarkable record, over .75% per month, but the killer here is that the remaining 36 months since 1932 averaged a measly +0.2% a month!” Reference to the remaining 5 months means that Grantham views the third year of the Presidential cycle as running from September to September. More importantly, we have missed the key months from September 30 to April 30. From 2014 to 2015, that time span had the S&P 500 rising by 11.39%, which is not too shabby given what the market has done since. Yahoo Finance only had S&P 500 data as far back as 1950. So my analysis is for the 16 third years since then (see the table below). We have completed 17 years from his September to April time frame, however, and I calculated an average 19.72% return for those time periods, with a median return of 19.49%. There was only one decline of -.76% in 1978-79. But dividends have not been included. So every period actually had a positive total return. For the full calendar third year, the average return was 17.12%, with a median return of 18.08%. That’s very good also, but not as good, and that is a 12-month return versus Grantham’s 7-month return. For all years since 1950, the average calendar year gain was 9.18%. Therefore, the average gain in the other 3 years of the Presidential cycle works out to 5.69%. Out of the 16 third years, 15 were up, and one was unchanged (2011). With stocks down YTD, the odds would appear to be good that we will get a nice rally over the last three months. I say ‘appear to be good’, because statistically we can’t calculate the odds. This is a small sample. It is not a random sample. And there is no solid theory to support why the pattern of the recent past should hold in the future. Let’s see how the last three months of the third year have done since 1950. From 9/30 to the end of the year, the average gain in the S&P has been 3.04%, with a median return of 4.39%. The mean is lower because of the skew created by 1987. Third Year Pres. Cycle %ch. Oct. 31 to end of yr % ch. Sept. prev. yr to April 3rd yr % ch. Full 3rd year % ch. April to Sept. 3rd yr % ch. 9/30 to end of 3rd yr % ch. Sept. low to end 3rd yr % ch. Oct. low to end 3rd yr % ch. Sept. 30 to Oct. low % ch. Sept. low to Oct. low 1951 3.62 15.32 16.35 3.7 2.19 2.19 4.9 -2.58 -2.58 1955 7.42 17.49 26.40 15.04 4.14 6.74 11.47 -6.57 -4.25 1959 4.12 15.04 8.48 -1.23 5.29 8.61 6.95 -1.55 1.56 1963 1.36 24.04 18.89 2.72 4.63 4.63 4.38 .24 .24 1967 3.40 22.79 20.09 2.87 -.25 2.98 3.4 -3.53 -.41 1971 8.34 23.31 10.79 -5.4 3.81 4.58 8.85 -4.63 -3.92 1975 1.29 37.39 31.55 -3.93 7.54 9.86 8.75 -1.12 1.02 1979 5.91 -.76 12.2 7.43 -1.35 1.35 7.84 -8.53 -6.02 1983 .84 36.55 17.27 1.00 -.69 .43 .95 -1.63 -.52 1987 -1.87 24.66 2.03 11.61 -23.2 -20.4 9.89 -30.1 -27.6 1991 6.28 22.64 26.31 3.31 7.56 8.73 10.69 -2.83 -1.77 1995 5.92 11.24 34.11 13.54 5.39 8.28 6.65 -1.18 1.53 1999 7.8 31.28 19.53 -3.93 14.54 15.84 17.78 -2.75 -1.65 2003 5.83 12.47 26.38 8.62 11.64 11.64 9.20 2.23 2.23 2007 -5.23 10.97 3.53 2.99 -3.82 1.15 -2.15 -1.71 3.37 2011 0.34 19.49 -.003 -17.0 11.15 11.34 14.41 -2.5 -2.69 2015 11.39 -7.93 Mean 3.46 19.72 17.12 1.96 3.04 4.87 7.75 -4.32 -2.59 Med. 3.87 19.49 18.08 2.87 4.39 5.68 8.30 -2.67 -1.09 (The median date of the September low is the 21st. The median date for the October low is the 17th.) The average fourth quarter gain for all years since 1950 is 4.06% with a median of 4.92%. So the third year of the Presidential cycle has a lower average using both measures. The much lower mean is probably because of 1987, but clearly the fourth quarter of the third year is actually not as good as other years. There were 5 down quarters out of 16. They were 1967, 1979, 1983, 1987 and 2007. But all 5 years that declined from April to September 30 (1959, 1971, 1975, 1999, and 2011) had good gains in the fourth quarter . This augurs well for 2015, but 5 out of 5 does not mean we have to get 6 out of 6. The average gain for the two months following October 31 was 3.46% with a median of 3.87%. I don’t know what the comparable percentages are for all years. Two years had declines – 1987 and 2007. So the return is better for the last two months than the last three months. This should not be a surprise. I compared the October lows with the September lows, and found that on average (in the third year), the October low was 2.59% lower than the September low (see the table). October had a lower low in 10 out of 16 years. If you can identify the October low, then the average gain from there to the end of the year was 7.75% with a median of 8.30%. 2007 was the only down year with a loss of -2.15%. Locating the vicinity of the October low is not as stupid as it sounds. The median low date was October 17th. Unfortunately, the 1987 crash was on the 17th, 18th and 19th with the huge losses on the 19th (I remember it well. I was 100% invested and canoeing a river in Missouri.). Eight of the 16 lows were on the 19th or later. Three of the lows were on the second to last or last day. So if you buy at the close on the third to last day, you should be able to beat that average return dated from the end of October. The last two days in October are pretty good on average. I will buy stocks when Financial Select Sector SPDR ETF (NYSEARCA: XLF ) hits a twenty-day high (adjusted for dividend payments). The levels are posted in my Instablog. I actually buy small caps when XLF hits a twenty-day high. I compared the Russell 2000’s performance in the fourth quarter of the third year with the S&P 500 since 1987, and found that on average the S&P did slightly better. The R2000 is more volatile. In strong fourth quarters, it beat the S&P. In weak fourth quarters, it underperformed badly; e.g. 1987. I’m pretty optimistic about the last two months of the year. There is a strong possibility that October will be bad, because of all the negative macro- indicators. Risky high-yield investments like MLPs, mREITs, and junk bonds have been hammered. Sentiment is very negative as indicated by Investors Intelligence, Hulbert’s sentiment measures, Rydex, and Citigroup’s Euphoria/Panic model. I think sentiment follows the market. If October brings further drops in stock prices, then these measures will become even more negative, but that will set us up for a bigger bounce into the end of the year.