Silver ETFs Regain Traction After 2-Month Retracement

Silver continues to gain in popularity as a substitute inflation hedge

Silver bulls stampeded back into the grey metal Friday after a two-month hiatus as renewed hopes of lawmakers agreeing to a coronavirus aid package sent the greenback tumbling. After initially saying that he was halting relief bill negotiations until after the Nov. 3 election, President Donald Trump reversed course late last week, offering a $1.8 trillion coronavirus stimulus package, moving closer to the Democrats' $2.2 trillion proposal.

Key Takeaways

  • Silver prices rallied Friday after renewed hoped of a coronavirus aid package passing through Congress sent the U.S. dollar lower.
  • The ProShares Ultra Silver (AGQ) fund broke out from an ascending triangle on above-average volume.
  • A breakout of the Global X Silver Miners ETF (SIL) above consolidation coincided with a bullish moving average convergence divergence (MACD) cross.

Furthermore, the commodity, which has outperformed gold by around 80% since the March pandemic-induced lows, also continues to gain in popularity as a substitute inflation hedge, given that it's still relatively cheap compared to the yellow metal by historical measures. The gold/silver ratio currently sits around 75, comfortably above its 20-year median average of around 60.

Active traders can bet on silver using the two exchange-traded funds (ETFs) outlined below. Let's take a more detailed look at the metrics of each fund and discuss several tactical ideas using technical analysis.

ProShares Ultra Silver (AGQ)

With assets under management (AUM) of $246.7 million, the ProShares Ultra Silver aims to provides two times the daily performance of silver bullion as measured by the fixing price, in U.S. dollars, for delivery in London. A modest 0.10% average spread and turnover of more than 2.5 million shares per day make the fund a popular choice for those wanting a leveraged bet on the silver spot price. As of Oct. 12, 2020, AGQ has returned 37.6% year to date and nearly 50% over the past three months. The ETF carries a 0.95% management fee.

After consolidating within an ascending triangle for two weeks at crucial support, price broke above the pattern's top trendline during Friday's session on above-average volume. Those who play the breakout should look for a retest of the 2020 high at $71.60. Protect against a sudden reversal by placing a stop-loss order under the September low at $37.31. The trade offers a risk/reward ratio of around 1:2, assuming a fill at Friday's $48.70 close ($11.40 risk per share vs. $22.90 profit per share).

Chart depicting the share price of the ProShares Ultra Silver (AGQ)

The risk/reward ratio marks the prospective reward investors can earn for every dollar they risk on an investment.

Global X Silver Miners ETF (SIL)

The Global X Silver Miners ETF, which charges a 0.66% management fee, seeks to return similar investment results to the Solactive Global Silver Miners Total Return Index – a market-cap weighted benchmark comprising companies actively engaged in the silver mining industry. Prominent silver miners dominate the ETF's portfolio of 27 holdings, with Wheaton Precious Metals Corp. (WPM) and Polymetal International plc (POYYF) both commanding double-digit allocations. Average daily dollar volume nearing $30 million, coupled with competitive spreads, make the fund a suitable trading instrument for those seeking exposure to silver mining companies. As of Oct. 12, 2020, SIL controls net assets of over $1 billion, offers a 1.11% dividend yield, and has gained 30.71% on the year. Since mid-July, the fund has added 14.95%.

The price of SIL closely tracks that of AGQ, clearly showing how correlated silver mining companies are to the commodity's price. Friday's breakout above consolidation also occurred on heavy volume, indicating larger players' participation in the move. Moreover, the MACD indicator crossed back above its trigger line last week to generate a buy signal. Silver bulls who buy here should consider booking profits near the August swing high at $52.87 but cut losses if the ETF closes beneath this month's low at $42.45.

Chart depicting the share price of the Global X Silver Miners ETF (SIL)

MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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