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Monster Gains in 2012: Leveraged Gold Vs. Leveraged Silver

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Funds like DGP and AGQ have performed extremely well in 2012, making them an enticing play for traders who can stomach the risk associated with these products.

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Precious metals have become increasingly popular in recent years, as continued easing from central banks around the world and escalating fear over the global economy has led to a massive inflow for these commodities. Though most are comfortable with your standard bullion or ETF, others bet big on these assets by utilizing leveraged funds. Thus far in 2012, both leveraged gold and silver funds have performed extremely well, making them an enticing play for traders who can stomach the risk associated with these products.

Leveraged Gold

The two leveraged benchmarks on gold come from the DB Gold Double Long ETN (NYSEARCA:DGP) and the 3x Long Gold ETN (NYSEARCA:UGLD). DGP applies a 200% leverage while UGLD features a 300% exposure for those who really want to put their money where their mouth is. DGP has about $550 million in assets (a healthy amount for a levered fund) while the more dangerous UGLD has just $55 million. UGLD's low asset base should come as no surprise as it is designed as a trading instrument rather than a fund that investors will buy and hold over the long term.

So far in 2012 DGP has tacked on a solid 24% while UGLD is up 32%; compare that to SPDR Gold Trust ETF's (NYSEARCA:GLD) current gains of 13%. The first thing investors will note is that neither DGP or UGLD are perfect leverages of the performance of gold. This always comes off as frustrating, but you need to keep in mind that when an asset has volatile returns (as gold has a tendency to move a fair amount each day), leveraged funds tend to look out of whack, although they are performing perfectly in regards to their reset times.

It is important to look at the reset frequency of a leveraged product so you will know how it will react to movements of this metal. Looking at the long term performance of a daily leveraged product will be incomparable to the baseline, as it is only meant to replicate day-to-day movements. Note that there are monthly and even lifetime leverages for those who are truly interested.

Leveraged Silver

For silver, the Ultra Silver Fund (NYSEARCA:AGQ) and 3x Long Silver ETN (NYSEARCA:USLV) reign supreme. AGQ employs a 200% leveraged and USLV a 300% leverage. AGQ is by far the largest leveraged commodity fund with more than $965 million in total assets, an extremely high number for a leveraged fund. USLV, not surprisingly, comes in a bit lower, but still maintains a healthy $125 million.

Thus far on the year, leveraged silver has ousted the gold competition with AGQ and USLV jumping 36% and 42% respectively. Compare this to iShares Silver Trust ETF's (NYSEARCA:SLV) gains of 22% and it is clear that these funds have been stellar on the year. Note that silver is more volatile than gold, and its big movements on the year are what account for these two products not being perfect long-term replications with respect to their leverage.

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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.
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