AGQ - AGQ: Unleashing The Silver Boom

2023-06-02 12:29:11 ET

Summary

• Silver experienced a 9% sell-off in May, but ETF investors have expressed interest for dip-buying over the past two months, indicating a potential rally.
• The photovoltaic market, accounting for a significant portion of silver demand, has been robust, particularly in China, causing silver vaults on the SHFE to decrease sharply so far this year.
• The ProShares Ultra Silver ETF, a 2x leveraged bet on silver bullion prices, may be an effective way to capitalize on this potential rally, but investors should be aware of the increased risk.

Thesis

Silver experienced a sell-off of 9% in May due to rising US real interest rates and a strengthening dollar index, but ETF investors have demonstrated a pattern of purchasing dips for two consecutive months. The photovoltaic market, which accounts for a significant portion of silver demand, has been robust, particularly in China, causing silver vaults on the SHFE to decrease sharply so far this year. The global silver market is anticipated to experience another significant deficit in 2023, per the Silver Institute . Against this backdrop , we argue that silver represents an attractive investment opportunity. ProShares Ultra Silver ETF (AGQ), a 2x leveraged bet on silver bullion prices, may be an effective way to capitalize on this possible rally.

Introduction to ProShares Ultra Silver ETF

Before delving into the dynamics of the silver market, it's crucial to understand the investment tool at the heart of this discussion - the ProShares Ultra Silver ETF. This Exchange Traded Fund ((ETF)) offers a unique opportunity for investors interested in silver. It targets investment results corresponding to twice the daily performance of silver bullion as measured by the London Silver Price. In other words, it's a leveraged play on silver prices, offering investors the potential for significant returns if silver prices rise. However, it's important to note that this also means increased risk, as losses can be magnified if silver prices fall.

Silver's Recent Performance and Market Factors

Silver experienced a significant 6% sell-off in May, while ProShares Ultra Silver ETF witnessed a plunge of 13%. This downturn, the worst since February and the most severe May performance since 2016, has seen silver lagging behind gold since the year's onset. The sell-off can be attributed to the rise in US real interest rates and a strengthening dollar index, as investors recalibrate their expectations around the Federal Reserve's policy.

ETF Investors and the Silver Market

Despite the downturn, ETF investors have shown a trend of dip-buying. Our estimates suggest that around 50 tons of silver were purchased by ETF investors in May, marking the second consecutive month of net inflows. After liquidating 2,800 tons in 2022, ETF investors have modestly increased their holdings by approximately 200 tons this year.

The Photovoltaic Market and Silver Demand

The photovoltaic market, accounting for nearly 30% of industrial demand for silver and 8% of global silver consumption, has started the year strong. China, representing 50% of the global market, installed 48.31 gigawatts ((GW)) of solar photovoltaic ((PV)) capacity in the first four months of 2023, nearly triple the 16.88 GW installed during the same period last year. This robust industrial demand has resulted in a significant decrease in silver vaults on the SHFE, with silver stocks at the Shanghai Futures Exchange declining by 632 tons or 29% since the beginning of the year.

Global Silver Market Trends

According to the Silver Institute's World Silver Survey 2023 , the global silver market witnessed unprecedented demand and a second consecutive year of structural deficit in 2022. All main categories of silver demand reached all-time highs, driving total silver demand to a new all-time high of 1.24 billion ounces. Global total consumption has risen by 38% since 2020 as global economies recover from the pandemic.

Silver Production and Investment

In contrast to record demand, global mine production of silver dipped slightly to 822.4 million ounces in 2022. However, global silver recycling increased for the third consecutive year, reaching a 10-year high of 180.6 million ounces. Net physical silver investment reached a new high of 332.9 million ounces for the fifth consecutive year. India emerged as the top buyer last year, with silver demand expanding by 188% due to lower prices and bargain buying.

Silver Market Outlook

The Silver Institute predicts a deficit of 142.1 million ounces of silver in 2023, the second-largest deficit in more than two decades. Industrial production is anticipated to reach an all-time high, driven by sustained growth in the photovoltaic market and robust demand from other industrial sectors. Supply gains are anticipated to be in the low single digits.

Conclusion: Silver as an Investment Opportunity with ProShares Ultra Silver ETF

Given the current market trends and the anticipated deficit, silver presents a promising investment opportunity. Leveraging ProShares Ultra Silver ETF, a 2x leveraged play on silver bullion prices, could be an effective strategy to capitalize on this potential rally. This ETF offers a unique opportunity to potentially double the returns from a rise in silver prices.

Risks to consider

Before making an investment decision in the ProShares Ultra Silver ETF, there are key risks to consider due to the unique return dynamics inherent to leveraged ETFs. In addition to the 1.5% management fee to generate the leverage, AGQ is subject to time decay, also known as "beta slippage" or "path dependency," which represents the gradual erosion of value in leveraged ETFs over time. This deterioration is due to the cumulative effect of daily resets. Typically, leveraged ETFs reset their exposure daily, meaning that the leverage is recalculated at the end of each trading day. Therefore, the performance of a leveraged ETF over longer periods may deviate considerably from the multiple of the performance of the underlying index or asset.

Before investing in AGQ, we advise investors to thoroughly review the prospectus and disclosures provided by the ETF issuer and to consult with a financial professional. Stacking physical silver is the optimal strategy for investors who desire silver exposure over the long term and need to sleep at night.

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