UGL - UGL: A Strong Buy Signal In Gold Deserves Some Leverage

2023-08-10 06:37:24 ET

Summary

• Aggressive gold investors may buy gold using leverage with the ProShares 2X gold fund.
• Three Key Indicators based on investor activity and newsletter writer expectations point to higher gold prices.
• The charts of UGL's net asset value and buying activity in UGL also suggests a significant move in gold, with a potential gain of 41% to 66%.

Our buy signal in gold last August is still in force. The mild price correction over the last 30 days seems to be ending and we expect a strong uptrend to begin. In fact, it may have already started.

We currently recommend GLD but now believe the move will be powerful enough to warrant the use of leverage. For those risk oriented gold investors, we now also recommend using the ProShares 2X gold fund (UGL).

The Best Indicators to Forecast Gold

The best indicators to forecast gold are not economic or those that forecast physical supply and demand, but those based on the buying and selling activity of certain investors, plus surveys that measure investor expectations for gold.

To begin, let's first look at the two indicators that measure buying activity of gold and gold EFTs, and the one indicator that measures investor expectations. We think all the three indicators point to higher gold prices.

Then we'll look at buying activity in UGL itself, which is the gold ETF we're recommending, to see if it confirms this bullish outlook.

The Sentiment King Long-Term Buyer Index for Gold

This indicator, which goes back to 2006, is unique to the Sentiment King. It's made by combining the investment activity of two trader types - gold asset managers and gold producers. The information comes from the "Commitment of Traders" data.

The green arrow on the right points to the strong buy signal that occurred last year, and it's the main reason was remain bullish long term. We'll probably remain positive on the long-term upward trend of gold until this curve moves into the red zone.

"Puts to Calls" Ratio of GLD

One of the reasons we continue to recommend GLD and now, with this article, UGL for those to aggressive investors who want to use leverage on an expected move in gold, is the high "puts to calls" ratio in GLD.

Options traders are notoriously wrong with their investment activity and a high puts to calls ratio is the classic indicator that reflects this. The "puts to calls" ratio is not only useful in determining the direction of the stock market, but other investments as well.

The chart above shows the puts to calls ratio for GLD and we've indicated high ratios of the past with dashed arrows. You can see the correlation.

Last month had the highest ratio in the last four and a half years. To us this is very bullish for gold and is one major reason we recommend UGL for those aggressive gold investors who want leverage.

Newsletter Writer Survey on Gold

The third chart is the Sentiment King ranking of the Hulbert gold survey, which calculates the ratio of bullish to bearish opinions of gold newsletter writers.

It's important to notice the black arrow on the right, which points to last year's green zone price low. It occurred when our ranking of bearish sentiment by newsletter writers was also in the green zone, which represents a buy signal. This was strong additional confirmation of the buy signal from our commitment of trader data shown in the previous chart.

As you can see, our current ranking of the survey is just above the zero line at -2.3. We're not worried about a top in gold until both indicators move into their respective red zones, and neither is close to that at this time. This gives us confidence that higher gold prices lie ahead. We recommend buying now and on any dips in price over the next few weeks.

UGL - Using Leverage

The chart below graphs the net asset value of the ProShares 2X gold ETF - UGL. This is the leverage gold ETF we recommend. It attempts to achieve a return equal to 2X the return of the Bloomberg Gold Subindex. The NAV is charted using a semi log scale to show the relative size of the various price moves.

We expect a significant move in gold that will push the price of UGL to a minimum price target of $83 or a high target of $98. This is a low end gain of 41% to a high gain of 66%. Investor buying activity in UGL, shown below, supports this overall positive outlook.

This chart plots average daily buying in UGL as a percentage of assets. The scale is inverted, which means low levels of buying at the top of the chart, and high levels of buying at the lower end.

History shows that investors in UGL are not good at predicting the direction of gold. They buy more UGL when gold is high and ready to decline, and less UGL when gold is at a low, ready to move higher.

We've drawn five arrows that point to low buying levels in UGL. It's easy to see that all five occurred at price lows, right before higher prices in UGL.

The last arrow on the right indicates the current low level of buying. This is added confirmation to us that gold prices, and the price of UGL, are going to move higher.

Risks

As with all leveraged investments, there are added risks and expenses. These risks and expenses both limit the returns and make it hard for managers to achieve their investment objectives. This is true of UGL.

In our opinion the largest expense factor at this time are high, short term rates, which raise margin costs and increase time premiums on futures and options. Because of this we don't believe UGL is a good investment longer than six to nine months. As a gold investment, it should only be used when indicators favor a strong price increase like we think they do now.

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