How to short silver

When the music stops, silver prices, which are more volatile than gold, could take a drubbing. Here’s how to profit off a rapid fall in silver prices.

There’s a party right now in precious metals. Over the past 12 months, silver prices have clocked gains of more than 150 percent. When the music stops, silver prices, which are traditionally more volatile than gold, could take a drubbing. Here are some ways to make money shorting silver should investor sentiment sour on the “devil’s metal”:

1) Inverse ETNs. The simplest way to bet against silver prices is by investing in a short silver ETF. ProShares UltraShort Silver ETF (NYSE:ZSL) uses financial instruments in an attempt to return 2X the inverse of silver spot prices. If silver prices fall 1 percent, ZSL should rise 2 percent. Conversely, if silver prices rise 1 percent, ZSL should drop 2 percent. Shares in the UltraShort Silver ETF trade on the NYSE just like shares in an actual company.

2) Short the long ETFs. Don’t like being limited to a single inverse ETF? You could also profit from a silver sell-off by shorting shares in a long silver ETF. iShares Silver Trust ETF (NYSE:SLV) is hands down the most popular long silver ETF with nearly 30 million shares trading hands every day. Other popular silver ETFs include the SPDR S&P Metals and Mining (ETF) (NYSE:XME), which invests in silver mining shares, and the leveraged ProShares Ultra Silver (ETF) (NYSE:AGQ), which attempts to return 2X the spot price of silver.

3) Go long the dollar. It will take some remarkable tightening by the Fed to convince investors that the dollar’s future looks promising. If they adopt an aggressive plan to raise interest rates, silver prices will likely lose much of their support. At the same time, the dollar should strengthen against foreign currencies. In such an environment, a bullish bet on the dollar itself makes sense. Buying shares in the PowerShares U.S. Dollar Index Bullish Fund (NYSE:UUP) is equivalent to going long the USD and short the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

4) Put options. Buying put options gives you the right to sell a stock at a specific price in the future. If you think the SLV is going to plummet by the end of May, you could buy put options that give you the right to sell shares in the ETF at a specific price – let’s say at $45. If the price of SLV falls below $45, you could go to the open market, buy the shares on the cheap, and re-sell them at the put option price. Incidentally, put options on the SLV spiked last week (per the Wall Street Journal) – an indication that investors are growing concerned about a silver sell-off.

5) Short the miners. Shorting the shares of specific silver mining companies could pay off. As the price of silver falls, so too will the profits miners reap. Silver explorers (companies that are yet to break ground on a mine) could be particularly vulnerable to a downdraft in silver prices. I’d caution, though, that you avoid shorting any company that could be subject to a buyout bid. Randy Smallwood, the CEO of Silver Wheaton Corp. (NYSE:SLW), went on the record recently predicting a wave of acquisitions when silver prices stabilize. If you’re caught shorting a company that’s bought out, your brokerage account could get cleaned out overnight.

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Top 5 best ways to short the dollar

Here are five simple ways to bet against the dollar; from opening a savings account in a foreign currency to investing in precious metals or American Blue Chip stocks.

1) ETFs. Perhaps the easiest way to bet against the dollar is by investing in an inverse dollar ETF. The PowerShares US Dollar Index Bearish ETF (NYSE:UDN) is the best in class with a daily trading volume around 156,000 shares. UDN shorts futures contracts as it tries to track the Deutsche Bank Short US Dollar Index (USDX) Futures Index. A better option, though, might be shorting an ETF that’s long the dollar in the form of UDN’s sibling, the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP). UUP has a trading volume that’s 16 times higher than UDNs, and some sources argue shorting long ETFs is a better strategy than going long short ETFs.

2) Buy gold. Since the supply of gold is relatively stable, the precious metal’s price tends to behave independently of the actions at the Fed’s printing press. If the value of the dollar goes down, gold prices can stay the same, but it’ll still take more dollars to buy the same amount of gold. Throw increased investor demand for gold into the mix when inflationary fears are building in the economy, and you’ve got a recipe for surging gold prices.

3) Convert your dollars to yuan. The Chinese government has loosened the strings it has the yuan of late, finally allowing allowing Americans to open yuan savings accounts directly in the U.S. The Bank of China branches in New York and L.A. allow investors to save cash in the form of renminbi (deposit up to $20,000 a year). Kiplinger also recommends checking out EverBank, which offers savings accounts in 20 foreign currencies (provided you pay a 0.75 percent transaction fee when you buy and sell currencies). Accounts can be started with as little as $2,5000.

4) Invest in multinational Blue Chips. While companies like tractor-manufacturer Deere & Company (NYSE:DE), The Coca-Cola Company (NYSE:KO) and software company Oracle Corporation (NASDAQ:ORCL) are all headquartered in the U.S., they derive significant portions of their income overseas. In the case of Oracle, 70 percent of the company’s revenues come from business outside of the U.S. Not only does these investments give you exposure to emerging economies, they hedge your exposure to the dollar while paying a modest dividend.

5) Invest directly in foreign companies. In the tech realm, the Chinese market operates behind what’s been dubbed The Great Firewall. American tech companies can’t get in, and a lot of the country’s biggest tech companies aren’t yet trying to capture audiences outside the domestic market. That means growth in your investment is unmoored from the performance of the dollar. In tech, consider SINA Corporation (NASDAQ:SINA), the maker of a Twitter-like microblogging service called Weibo. China’s financial markets has a new player in wealth management company Noah Holdings Limited (NYSE:NOAH) and the Chinese advertising industry looks like it’s led by Focus Media Holding Limited (NASDAQ:FMCN). There are also numerous plays in China’s solar industry from JA Solar Holdings Co., Ltd. (NASDAQ:JASO) to Trina Solar Limited (NYSE:TSL) to name a few.

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How to Short Gold, Part II

Relatively small upward moves in the dollar can lead to rapid drops in the price of gold. If your timing is right, you can not only protect yourself from losses in gold, you can capitalize on the strength in the dollar by shorting gold.

Let me be clear up front: I do not think that now’s an appropriate time to short gold. That said, investing always moves in cycles, and we’ve got to be ready to jump ship if it looks like the fat cats are losing interest in the yellow metal. In my last post on shorting gold, I pointed out four simple ways to short gold. What I neglected to mention was one rather roundabout way that are a lot of people don’t think about when it comes to shorting gold: namely, going long the dollar.

Gold and the dollar have long had an inverse relationship as gold is frequently a hedge against inflation. When the dollar goes down, investors move into gold and vice versa. If you’re looking to short gold, then, but you don’t want to deal with the unpredictability inherent in gold mining stocks, you might consider going long the dollar in the form of an ETF such as the PowerShares DB US Dollar Index Bullish (NYSE:UUP).

Relatively small upward moves in the dollar can lead to rapid drops in the price of gold. If your timing is right, you can not only protect yourself from losses in gold, you can capitalize on the strength in the dollar.

Want more? Read my original post: How to Short Gold.