This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Hedge Your Hedge in Precious Metals

The past three months would seem like the worst time to be short a long leveraged ETF in precious metals. In fact, UGL has outperformed the SPDR Gold Trust (GLD) by almost exactly 2 times, which is its daily leverage mandate, whereas AGQ has performed about 2.5 times better than silver. But even in that environment, this setup performed slightly better than just a purchase of GLTR alone. Obviously, the slight outperformance was due to palladium, but I believe there will still strong performance in both palladium and platinum going forward. Also, if this is a hedge against fear, inflation and even equities, then slightly longer positions in palladium and platinum should offset some of the underperformance in gold and silver if the economy strengthens and the bullishness wanes for "safe haven" plays in precious metals.

For those looking to increase the GLTR position to $2,000, but believe a trend -- whether it be bullish or bearish -- is likely, then a simple flip can be done. Rather than shorting shares of UGL and AGQ, a trader would buy the corresponding dollar values from above in the ProShares UltraShort Gold (GLL) and the ProShares UltraShort Silver (ZSL). If gold and silver continue to move higher in a trending fashion, then the daily reset will result in these falling at slower than a 2-times rate over a longer period. If gold and silver were to fall in a continuous and trending fashion, then these two positions will see performance close to the 2.5-times performance AGQ has shown over the past three months. Either way, a trend will most likely result in better performance. Of course, in either scenario a trader could use longer-dated deep in-the-money calls or puts rather than going long or short shares. I especially prefer the use of puts over shorting shares if the cost of time is reasonable. It's something to keep in mind since shorting leveraged ETFs involves borrowing costs and call-in risk.

Hedges are useful tools for many portfolios, but sometimes our hedges can be just a bit better if we hedge them as well.

At the time of publication, Collins was long AGQ puts and short ZSL calls.
Timothy Collins has worked as a financial adviser since 1999, focusing on portfolio customization, with a concentration on correlation arbitrage and risk-managed growth. He started Collins Capital Advisors in 2007, which has evolved into TangleTrade Management, LLC. TangleTrade is an RIA firm dedicated to formulating customized risk-managed investment strategies for individuals and small businesses. TangleTrade Management now manages the TangleTrade Fund, a correlation arbitrage hedge fund utilizing the trademarked InterETF strategy.

Prior to joining his first firm, American Express Financial Advisors, in 1999, Collins worked as a staff accountant for United Information Systems in Bethesda, Md. He has also worked as a financial analyst for Securities Pricing and Research in Annapolis, Md. Collins is a graduate of McDaniel College (formerly Western Maryland College), with degrees in business administration, economics and sociology and is a winner of the Bates Prize.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
GLL $113.15 0.80%
AGQ $30.82 -3.10%
GLD $104.46 -0.45%
GLTR $54.93 -0.23%
ZSL $125.67 2.30%

Markets

Chart of I:DJI
DOW 17,528.65 -161.21 -0.91%
S&P 500 2,090.18 -13.66 -0.65%
NASDAQ 5,094.4140 -33.8670 -0.66%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs