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Natural Gas Liquidity Could Suffer After End Of Triple Leveraged Products

  • UGAZ and DGAZ were highly liquid alternatives to the NYMEX futures

  • A delisting by Credit Suisse of its VelocityShares ETNs

  • Futures, futures options and BOIL will pick up the slack but expect a decline in some speculative activity

ETF and ETN products tend to add liquidity to the futures markets. The derivatives allow for speculation in commodities futures markets without venturing into the futures arena. They have increased the addressable market as they are available to market participants with a standard equity trading account.

The first ETF/ETN product in the commodities asset class was the GLD that replicates the price action in gold. Since then, a host of other unleveraged and leveraged products burst upon the scene in many different raw material markets. The rise of the derivatives has added to the volume, and open interest as market makers, arbs,  and other market participants hedge the price risk in the futures market.

Natural gas is one of the most volatile commodities that trade in the futures markets. The UGAZ and DGAZ products that offered triple leverage on the up and downside in the natural gas arena traded millions of shares each day. The United States Natural Gas Fund (UNG) is the unleveraged natural gas product that follows the price of the energy commodity higher and lower.

UGAZ and DGAZ were highly liquid alternatives to the NYMEX futures

UGAZ and DGAZ became standard products for market participants looking to take risks in the natural gas arena without venturing into the futures market on NYMEX. The short-term triple leveraged products traded millions of shares and added significant liquidity to the futures arena as the hedging of the risk positions found their way into the active month futures contracts.

The Velocity Shares 3X long and short ETN products were highly successful over the past years as an alternative for those with access to a standard equity account. Credit Suisse was the issuer of the ETN products. ETNs have an added risk of the credit of the issuer.

A delisting by Credit Suisse of its Velocity Shares ETNs

On June 22, Credit Suisse AG announced its intention to delist and suspend further issuances of a host of leveraged ETN products, including UGAZ and DGAZ. The financial institution did not provide specific reasons for the decision, but it was likely the result of events in the crude oil futures market on April 20. When the nearby NYMEX crude oil futures contract fell below zero, and a low of negative $40.32 per barrel, it sent a chilling signal to the derivatives markets. The potential for a similar move in natural gas or other commodities was likely behind the decision.

Natural gas has a long history of volatile price action as it has traded from a low of $1.02 to a high of $15.65 per MMBtu since 1990. The potential for a move below zero in the natural gas futures market at its delivery point at the Henry Hub in Erath, Louisiana, likely drove the decision to delist the bullish and bearish leveraged ETNs late last month.

Futures, futures options and BOIL will pick up the slack but expect a decline in some speculative activity

Natural gas will continue to attract speculators looking to participate in bullish and bearish price trends in the energy commodity. When it comes to leverage, the only choices are the futures arena or the ProShares Ultra Bloomberg Natural Gas product (BOIL) and its bearish counterpart (KOLD). The fund summary and top holdings of BOIL include:

Source: Yahoo Finance

BOIL offers double leverage on the upside, and KOLD is the inverse product. BOIL and KOLD have net assets of $50.6 and $25.19 million, respectively. BOIL trades an average of 1,022,814 shares each day, while KOLD's average is 132,409 shares. BOIL charges a 1.31% expense ratio, and KOLD's is 1.54%.

The BOIL and KOLD products have experienced an increase in volumes now that UGAZ and DGAZ are no longer available. However, the volume on the natural gas futures exchange is likely to suffer as the millions of shares of the triple leveraged Velocity Shares products will no longer translate into buying and selling in the futures market.

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The United States Natural Gas Fund L.P. (UNG) was trading at $9.72 per share on Tuesday morning, up $0.11 (+1.14%). Year-to-date, UNG has declined -42.35%, versus a 2.49% rise in the benchmark S&P 500 index during the same period. UNG currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #72 of 111 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...  
NYSE:UNG July 21, 2020 11:22am

Is It Time to Take Profits on Silver?

It's been an incredible past few weeks for silver (SLV) with the metal finally playing catch-up after a horrid relative underperformance vs. gold (GLD). The metal is now up 15% for the month and 18% year-to-date, after briefly staring down a significant double-digit loss during the mid-March turbulence.

While this performance is a huge change of character and suggests that higher prices are likely long-term, we are seeing a problem short-term: extreme optimism surrounding the metal.

Over the past couple of weeks, we've seen multiple calls for $35/oz silver before year-end, and it's always worrisome when market participants are talking about 50% higher prices after we've already witnessed a sharp rally. Therefore, I believe investors would be wise not to chase silver here above $21.00/oz.

A screen shot of a computer Description automatically generated

(Source: TC2000.com)

As we can see in the chart above, it's been an impressive two months for silver as it continues to outperform the yellow metal, more than offsetting the significant underperformance since the start of 2020.

While we have not yet confirmed a bullish turn in this indicator, which will require a move above 0.125, this is a definite step in the right direction as we now have an uptrend in place. Generally, silver leading gold is an excellent sign for both metals, but especially for silver, and this suggests that higher prices are likely long-term for both metals.

Unfortunately, the worst thing for a bull market is extreme optimism, and we can now see the first signs of that in silver. This doesn't mean that this bull market is in jeopardy; it merely suggests that it's getting over-heated and could use a pause. Let's take a look below:

(Source: Daily Sentiment Index Data, Author's Chart)

If we look at the chart above, we can see that the best time to buy silver is when it's trading below the 50% level and close to the green zone. Conversely, the best time to take profits is when silver heads into the red zone, an area of extreme complacency.

The last time the metal went into this zone was in late August 2019, and the metal saw a 15% correction in less than three months, the last thing that market participants were expecting at the time. However, this is precisely why that correction occurred, everyone was looking up, and the market tends to make a fool out of the most people possible.

Given that everyone is now looking up again, and looking for $30/oz silver, a pullback here would not be surprising. Let's see if the technicals are confirming this:

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

As we can see from the technical picture, we now have new support near the breakout at $18.00/oz, but we're now within a hair of strong resistance at $21.25/oz for silver.

Therefore, for investors that were buying the dip in silver below $17.00/oz, this is a good area to book some profits, especially in silver miners that have seen a strong run.

While we may break above this $21.25/oz resistance level, I believe it's less likely given that we now have a very crowded trade on the long side.

The recent rally in silver has finally converted many non-believers into bulls, and this does not bode well for silver short-term. We now have 8.5 bulls for every 1.5 bears in silver based on an 85% optimism reading, and this is rarely a good sign for the metal.

Based on this, I am taking some profits in my silver miner positions, and I would caution against adding new exposure here. It is certainly possible that silver can move a little higher as retail begins to pile into this trade finally, but I prefer to be buying when retail is spooked, not finally plowing into a trade they've been ignoring for weeks.

As long as the bears can defend $21.25/oz on a weekly close, they will be able to keep a lid on this silver bull market for the time being.

Disclosure: I am long GLD, PAAS, SILV

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The iShares Silver Trust (SLV) was trading at $19.56 per share on Tuesday morning, up $1.03 (+5.56%). Year-to-date, SLV has gained 17.27%, versus a 2.29% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:SLV July 21, 2020 11:04am

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NYSE:USO July 20, 2020 9:50am

Why is Natural Gas Trading Down 3.5% Today?

NYSE:UNG July 16, 2020 2:29pm

Silver Trade Getting Crowded, Time for Caution

It's been a strong start to Q3 for silver (SLV) with the metal up 7% in just ten trading days, outperforming every other asset class.

This significant outperformance has contributed to the metal's relative strength in Q2 vs. the gold price (GLD), further emboldening the view that it might finally be silver's turn to play catch-up and break out of a multi-year base.

However, we've seen a plethora of articles the past week on $30/oz silver, the explosive move that's coming, and some analysts even slapping $35/oz price targets on silver before year-end. When this occurs, it's often time to be cautious and, at a bare minimum, not be in a rush to add to new positions.

This is because most of the metals bugs wander out of the woodwork to call for grandiose price targets at the worst possible times, typically at the same time that things are getting a little frothy. Let's take a closer look below:

A picture containing computer Description automatically generated

(Source: Author's Chart, CFTC Data)

As I've shared for several weeks, we continue to see a positive divergence in the price of silver vs. small speculator positioning with silver closing at its highest levels in two years, but speculative exposure remains quite low. This positive divergence remained in place last week, and this has emboldened the argument that sharp pullbacks in silver will be buying opportunities.

This is because there are still tons of market participants left to convert to bulls, the complete opposite of last August when we had speculators crawling over each other to get into the silver trade, with sentiment being a massive headwind.

Therefore, from this indicator alone, there's no reason to be overly cautious, even if small speculator exposure is trending up marginally.

A picture containing water, table Description automatically generated

(Source: Daily Sentiment Index Data, Author's Chart)

However, my second gauge for judging sentiment moved onto a caution signal yesterday, with the long-term moving average for silver pushing above the 80% bulls level.

This suggests that there are eight bulls for every two bears over the past six weeks, which is generally not a great sign for the metal short-term. As we can see, the last time this occurred was in August 2019, and it marked the top for silver within one week. Just because the metal fell apart the last time this indicator hit this reading does not mean we have to see a medium-term top this time around, nor that we have to correct 20% like we did last time.

However, it does suggest that any further rallies from here are likely to run into selling pressure, and I would expect the $20.00/oz to $20.30/oz area to be a brick wall short-term if this rally does continue.

So, what's the best course of action here?

A screenshot of a video game Description automatically generated

(Source: TC2000.com)

As we can see from the technical picture, silver is currently trading above long-term resistance at $18.95/oz, but this resistance must be broken on a weekly close to be invalidated.

While a breakout would be a bullish development, the excessive optimism suggests that the breakout might not be as explosive as some are expecting, as too much optimism tends to put a lid on prices.

This does not mean that silver can't rise another 5% to 7% in the next month, but it does mean that any move above $20.25/oz will likely be a profit-taking opportunity. This is because it's rare that silver holds onto its gains when the trade is already crowded.

Therefore, I see the best course of action here as taking as being patient to add any new exposure, and taking some profits if we do head closer to $20.00/oz. For now, I have no positions in silver, but I remain long Pan American Silver (PAAS), GoGold Resources (GLGDF), and Silvercrest Metals (SILV), my three favorite plays on the silver price.

Disclosure: I am long GLD, GLGDF, PAAS, SILV

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The iShares Silver Trust (SLV) fell $0.25 (-1.38%) in premarket trading Thursday. Year-to-date, SLV has gained 7.37%, versus a 0.33% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:SLV July 16, 2020 9:28am

Natural Gas Has More Room to Rally

NYSE:UNG July 14, 2020 9:40am

Crude Oil Crawls Higher as Interest in the Market Declines

NYSE:USO July 13, 2020 9:36am

Natural Gas Setting Up for Potential Short Squeeze

NYSE:UNG July 9, 2020 12:55pm

Silver Continues to Get More Attractive: Buy the Dips

NYSE:SLV July 9, 2020 10:59am

High Levels of Bullish Sentiment Could Limit Gold’s Upside

NYSE:GLD July 7, 2020 1:13pm

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