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 10 best gold and silver ETF funds

Here’s a look at the Top 10 best gold and silver ETFs on U.S. exchanges ranked by volume. The iShares Silver Trust (SLV) trades more than twice as many shares as its nearest competitor GLD.

Here’s a look at the Top 10 best gold and silver ETFs that trade on major U.S. exchanges. We’ve ranked them by volume, as some of the niche ETFs in the precious metals market are so thinly traded they can be subject to extreme price volatility or – in some cases – underperformance when compared with the underlying commodities they’re supposed to track.

iShares Silver Trust (ETF) (NYSE:SLV), Volume 38 million shares The world’s largest silver ETF, the iShares Silver Trust currently holds 10,764 metric tons of silver. That’s a lot of ingots. The SLV is the second-strongest performer on our list of the Top 10 gold and silver ETFs, getting shown up only by the Ultra Silver ETF (a double-long silver ETF). With an average volume around 38 million, SLV is easily the most active gold and silver ETF on the market. 12-month performance: +107 percent

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SPDR Gold Trust (ETF) (NYSE:GLD), Volume 17.4 million shares Among the most well-known ETFs on the exchanges, it’s more common to hear the SPDR Gold Trust referred to by its ticker: GLD (that’s when you know you’ve made it). The GLD currently has a market cap of more than $56 billion. 12-month performance: +26 percent

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Market Vectors Gold Miners ETF (NYSE:GDX), Volume 5.8 million shares The GDX seeks to mirror the NYSE Arca Gold Miners Index – an index that’s weighted toward large-cap gold mining stocks. The index’s single largest component stock is Barrick Gold Corporation (USA) (NYSE:ABX), which makes up nearly 17 percent of the index’s weighting. 12-month performance: +29 percent

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iShares Gold Trust (ETF) (NYSE:IAU), Volume 5.2 million shares A physical gold ETF, the iShares Gold Trust has largely played second fiddle to GLD. IAU has a market cap of $5.4 billion while GLD’s market cap exceeds $56 billion. 12-month performance: +26 percent

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SPDR S&P Metals and Mining (ETF) (NYSE:XME), Volume 2.8 million shares The SPDR S&P Metals & Mining ETF mirrors the S&P Metals & Mining Select Industry Index by buying baskets of shares in metals and mining stocks. The index is comprised not just of precious metals but steel, coal and consumable fuels, aluminum and other metal and mining-related stocks. Most recently, the ETFs largest holding was Australian iron ore and coal producer Cliffs Natural Resources Inc. (NYSE:CLF), which made up 4.71 percent of the fund’s holdings. 12-month performance: +26 percent

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Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), Volume 1.8 million shares The Market Vectors Junior Gold Miners ETF mirrors the Market Vectors Junior Gold Miners Index. Since the Junior Gold Miners Index is comprised of small- and medium-cap gold mining stocks, the GDXJ is subject to more volatility than the GDX, which is geared toward larger mining companies. When the industry’s doing well, GDXJ does even better. 12-month performance: +53 percent

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ProShares Ultra Silver (ETF) (NYSE:AGQ), Volume 1.59 million shares The AGQ ETF invests in silver futures and forwards as it seeks to return 2X the daily returns of silver as measured by the U.S. Dollar fixing price for delivery in London. It’s a very bullish bet that silver’s going to rise in the coming days. Just don’t be caught holding it if sentiment shifts away from the metal. 12-month performance: +266 percent

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PowerShares DB Gold Double Long ETN (NYSE:DGP), Volume 476,000 shares DGP invests in gold futures contracts as it attempts to return 2X the daily price of gold bullion as measured by movements in the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold. 12-month performance: +53 percent

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ProShares Ultra Gold (ETF) (NYSE:UGL), Volume 223,000 shares UGL seeks twice (200%) the daily performance of gold bullion by investing in gold futures and forwards. The fund has shot up 12 percent over the past month. 12-month performance: +51 percent

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ETFS Gold Trust (NYSE:SGOL), Volume 151,000 shares SGOL is designed to reflect the performance of the price of gold bullion backed by physical gold that’s held in Zurich, Switzerland. The fund’s physical gold conforms to the London Bullion Market Association’s (LBMA) rules for Good Delivery. 12-month performance: +26 percent

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Honorable Mention: Direxion Daily Gold Miners Bull 2X Shares (NYSE:NUGT), Volume 28,500 shares The newest of the offerings on our list, NUGT seeks to return 200 percent of the price performance of the NYSE Arca GoldMiners Index. Interestingly, the fund counts GDX (another gold mining ETF listed above) as its largest holding. 3-month performance: -4 percent

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