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, Blockdesk (1,791 clicks)
ETF investing, CFA, portfolio strategy, long/short equity
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Heck, for those who worry about currency devaluations, any time is a good time.

But for those of us who want to work our capital assiduously and productively, there are usually alternatives that may often be more competitive.

Unfortunately for such decisions, the precious metals arguments basically revolve around guesses about metal prices, politics, and mining uncertainties, all of which are basically unknowable, but must be part of the consideration.

That is not what is unfortunate. What is unfortunate is that by dominating the conversation, those subjects tend to crowd out contemplation of what the players who count are likely to do that will influence results, and therefore the answer to our headline question.

Our style of investment analysis is to regard the actions of players in the game as among the most significant factors building and keeping an investment score - how fat is your wallet?

So we tend to look at precious metals investments through the same prisms as we do tech stocks, consumer stocks, entertainment issues, resource plays, defensive names, income sources, and all investments. Our driving question is: What will big-money players be most likely to do with each alternative investment candidate, given their present knowledgeable outlook?

Our answers come from the Market-Makers [MMs] who help the money big-dogs move around the capital at their disposition. We have many years of watching that game be played, and know some things about it that are not commonly shared in (or out) of the business. We have kept daily scorecards on 2500+ stocks, ETFs, and market indexes since the turn of this century.

One of the best ways to get a perspective of any investment group is to study the Exchange Traded Funds [ETFs] that focus on the subjects of interest. So we do that with the Precious Metals ETFs (as well as on the individual stocks). Here is what we currently learn about the MMs outlook for those ETFs. Learned from the way that the MMs protect their capital by hedging while it is exposed to risk in facilitating markets for these issues.

(click to enlarge)

For readers who have not encountered our tables before, some orientation and explanation may be helpful. The forecast price ranges implied by MM hedging are in the two left-most data columns, accompanied by a third column of the market quote at the time of the forecast derivation. For most investors a "long" investment posture is the usual, and that is what the table contemplates.

We find what works well with these forecasts is to take the top of their ranges as sell targets, and follow a strict discipline of closing out and forecast-induced position just as soon as a target can be achieved. Failing that within 3 months (63 market days), the position should be terminated, regardless of price, and the capital reinvested in the most attractive alternative present at that time. This discipline protects against the waste of your most precious investment asset - TIME. Support of this notion can be found here, and is worth exploring when done with this article, because much precious metal investing is seriously damaged by failure to recognize its cost.

The size of the opportunity being offered in the sell target is shown next to the Price Now column, and to its right is its appropriate risk measure, the worst-case price drawdown experienced on average among each of all past forecasts in the last 5 years having the same balance of upside-to-downside price prospects as the present forecast. The most right-hand column in the table puts those comparisons into direct measurement.

Most of the remaining data in the table is the result of keeping book on what has happened in the real world of the market subsequent to prior forecasts like those of today. The extent of those experiences is spelled out in the Sample Size column. That is important where inadequate lengths of time have been available to make observations (our preference is 3 years of 252 market days). Or where very few instances of upside-to-downside prospects like today's have been experienced to provide statistical significance to the averages resulting. We like to see at least 20.

Using the sell discipline described above, the Win ODDS tell what percentage of each prior sample produced a profit, and the % PAYOFFS tells what the size of that net average has been. The days held tells what time (in market days) had to be invested, along with the capital. It provides the basis for the more comparable Annual Rates of Return column.

Out of the 20 available ETFs, we have applied screens of criteria preference to the size, character, and tradeoffs of reward and risk that are presented by the current forecasts and the previous experiences of similar outlooks. That has resulted in the identification of four ETFs that appeal most to us. Their average scores of the various criteria columns are spelled out in the first blue row of the table. The next row provides the whole group's averages.

Now comes an answer to our headline question of "is this a good time" to make bets of this kind.?

Comparison of the columnar criteria averages for the precious metals ETFs with their parallels of the best 20 choices in the whole population of 2500+ alternatives, suggests the answer to our question is probably "no". Here's why:

The data in red at various places in the table illustrates the problems raised by these comparisons. Starting at the top of the table in the Credible Ratio column, its comparison between the offered Sell Target Potentials and the actually-achieved % Payoffs indicates in red those places where today's prospects have not been achieved, on average, in the past. Please note the deficiencies not only in the "best" PM ETF four, but in the whole group.

That kind of failure has contributed to the PM odds, far below the population best 20 average of 93 out of every 100, and below the 81 average profitability of SPY, the S&P500 ETF (as a market average proxy). But then, even the population's average (from today's outlooks) is no better than two wins out of three.

The Reward-to-Risk experiences are another problem area. That column's averages for the 20 PM ETFs are 3.8 times as much upside price change promise as actual price drawdown experience. That compares to 4.2 times for the best 20 of the large population. But more seriously the PM upsides have little credibility, bringing into question the validity of that measure. Both the top 20 population alternatives and the market proxy, SPY, overpromise, but not by as much as the PMs.

Perhaps the more serious limitation for many investors is in the size of the drawdown risks actually experienced. For Precious Metal ETFs they have been 3 to 4 times as large as alternative investment candidates. That makes them far more subject to the emotional stresses leading to bad judgments at the worst possible times.

Given today's data we see no good reason to encourage investments in the precious metals ETFs instead of redeploying capital to more promising alternatives.

That is not an everlasting damnation of precious metals investments, just a reading of the current outlooks of experienced, able, and highly-motivated professionals as to alternatives. Times will undoubtedly come when prior human foibles of dealing with currencies will be appraised by humans in a way that will make precious metals investments far more attractive than they are now.

Source: Is Now A Good Time To Buy Precious Metals?