Gold and Precious Metals - It's Time for a Breather

By: Steve Bauer | Wed, Feb 2, 2011
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My aim, as an old professor of finance and economics, is to continue to teach and to share what I have learned. The theme of this article is:

"Why Most Investors and Nearly all Traders Lose Money."

That thread or theme is very clearly evident with regard to my research / analysts when the subject comes to Gold or Precious Metals.

Often one of the most important things an investor forgets is that what appears to be a fact is, in reality, very creative fiction. The flow of fictional stories being told by Wall Street, the media, financial analysts, asset managers and financial salespersons are so compelling that the average Investor takes the bait along with hook, line and sinker nearly every time. That's a fact and, for me, it is very sad. The fact for you is that it is a very expensive and non-productive way to invest.

Being wrong is human, but your not confirming what is being promulgated by the above sources is fringing on stupid.

This scenario has been true about Gold and most Precious Metals and Commodities for quite some time. That is because these commodities have performed very well over the past decade. The false pictures painted / stories told by the "Street" is one of my most serious concerns. The information that is propounded is "in part" correct. However, these people nearly always leave out the big picture. It is this "big picture" that I wish to share.

I realize that this is a rather unique opinion for a financial analyst to make, but you just might want to take heed: If you are not selective with your specific investment decisions, in this current marketplace your profit potential will be adversely affected by 10% - 25% or more by the time you liquidate those securities. That's a big percentage to give away and can be avoided with just a little homework prior to taking positions. (below I would briefly like to re-introduce you to my "Bell Curve" of "Investing Wisely."


Gold and Commodities:

If you think Gold, Precious Metals or Commodities as an asset class is well understood, you are very wrong. Hopefully, after reading this missive and studying the charts below you will realize that the risk is much greater than you are led to believe. That includes all Gold - ETFs, mining companies and particularly the junior miners. It is my objective to help you realize the level of misconceptions that exist, both in the financial industry and individual investors, perhaps like you.

The typical propaganda disseminated by the financial industry that surrounds Gold and other Commodities at times like this when they have performed very well is just plain, incomplete and misleading. In the past (see my 35 year chart) when corrections or pull backs have occurred the losses are appalling. I hope you will note that corrections are rather normal for Gold, which often take place a couple of times each year. (see my 10 year chart). During these short lethal and meaningful corrections, there is much "babbling" coming from uninformed people who continuously claim that - this is the end of the precious metals "bubble". And of course the financial media grant them a platform to spread their disinformation to even further confuse investors. Check this out - it is deadly, profound and accurate.

You can see from both the 10 year and 35 year charts below exactly what I am sharing.

The huge problem I have with all of this is - the hype and misinformation currently being so freely given is - complete truth or just enough truth to sell something!

I am definitely not saying that this is the end of the current 10 year move in Gold or related Commodities. What I am saying is that the risk/reward ratio is very high, and it is time to take a breather. Regroup and decide if this is a place you consider as one where you are "Investing Wisely."

So now that I have hopefully established the scenario of "why most investors and nearly all traders lose money." Now, I would like to give you a graphic perspective that is - more than compelling.

This 10 year chart tells a very compelling story and is what has been used to sell many an investor securities of all shapes and sizes in the Gold and Precious Metals arena. This is very deceptive selling and I for one think that disclosure should be much more strictly enforced. It won't be so you will have to decide for yourself, whether or not to invest in Gold and Precious Metals.

This 35 year chart tells the real story and is seldom if ever used to sell securities of all shapes and sizes in the Gold, Precious Metals and Commodities arena. If you like buying at the top or what we call "over-bought" or a "Positive Alpha" then that is your decision, and you will often be wrong in doing so. Remember there is also "over-sold" and "Negative Alphas." You might also remember the old axiom that everything eventually returns to its "Mean." Please note that there have been many serious negative and sideway periods in Gold. The period of the peak of 1980 to the recovery of 2006 is 26 years. That means you held Gold for 26 years at a loss before you recovered and began the profitable ride to the possible "peak" of today's Gold market. Also note that this current rally began in 2000 and was up substantially by the time you recovered in 2006. Please take some time to study this particular chart.

Gold - London PM Fix 1975-present

I would like to offer just a quick remark about the risk/reward ratio. In 2008, many of the junior mining stocks sold off by 75% or more! Some, actually many, have not recovered since. Need I say more?

Don't be suckered into purchasing Gold mining investments sold to you by a salesperson - ever! If you are not capable or do not have the time to do all the necessary analytics yourself then pass and find solid investments like AAPL and similar quality companies. Don't violate this advice or one day you will seriously regret it, maybe that day has already occurred.


A Bell Curve Helps Explain Why "My Rotation Model" is so Important:

Perhaps this missive on Gold, Precious Metals and Commodities will bring some perspective to your "Investing Wisely" and rekindle my sharing my, not so popular, Bell Curve. "Not so popular" is in reference to my criticism financial sales persons.

This graphic is all you need to be consistently profitable on an annual basis. Obviously it is not that easy but if you use conservative Inflection Points and invest during Bullish Market conditions in the A's and in Bearish Market conditions in the F's you will do quite well.

Bell Curve

Notes for the above Bell-Curve: The far left is where the very best (Top) bullish candidates for buying currently reside at a given time. The far right is where the very best (Bottom) bears candidates for shorting currently reside at a given time. The blue line or Bell-Curve has three important areas of consideration. The Top and between -2 and +2 are where most companies are most of the time. The far Left and the far Right is where rather few companies reside at any given time. The Bullish - Top 5% at or around Bullish Inflection Points and the Bearish - Bottom 5% at or around Bearish Inflection Points.

It is vitally important that you understand that the companies are constantly rotating and cycling into and out of favor over time. That means that at one point of time, say the period of one year or more, there are only about 5% or less of all the companies in a given universe those are "Top Bullish or Bearish" candidates for investment. Therefore, consider the bottom line (axes) also as a time line.

Offering you an analogy or perspective for understanding: Remember in school that in every single class of students there were very few A's and F's, more B's and D's and lots of C's. It's the same with "Investing Wisely." Buy only the "A's" and Short only the "F's" is my advice.


My Wrap:

While I believe the general market may be in for a meaningful pullback, the prevailing question from most investors is: When? How big and how long will it be? Do I hold my current positions or do I sell? Is there a profitable alternative? The answer will be obviously quite clear when the pullback is over but an old axiom for profitable investing tells us to be prudent in times like this. You might want to remember that, cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may also be wise.

My focus is "investing wisely," e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. These cycles are both economic and stock market in nature and must be carefully and frequently analyzed. Within the stock market, you can integrate modern analytics within these "cycles." This also means maintaining a comprehensive process of the thorough economic, fundamental, technical and consensus analysis of many companies, 15 sectors and more than 200 industry groups in my universe. I believe that this discipline provides the necessary clarity regarding the rotation that the economy and most all sectors, industry groups and companies go through - from favorable times to unfavorable times and perhaps back again. Few investors seem to understand that it the same for the economy. The world continues to produce an economic "cycle" effect that continues as a process, like - life itself.

My economic work is just another one of many "bellwether" forms of research/analytics to help identify prudent securities for buying and for short selling as the marketplace cycles from bull to bear and back again - over, and over and over again.

The good news about the marketplace is that we are presented frequent and conservative/low risk opportunities to invest long, invest short or to simply to hold cash. For me, this is called "investing wisely."

If you would like to have further information on my work / analytics or perhaps my professional asset management, mentoring or consulting - services...

Just send me an Email, and I will respond promptly.

Thank you for your time in reading my "stuff" and continued interest in my work / analytics.

Smile, have Fun - "Investing Wisely",

 


 

Steve Bauer

Author: Steve Bauer

Steven H. Bauer, Ph.D.

Steve Bauer

Steve has several degrees, i.e. post graduate degrees and doctorate and a great deal of (too much) continued education. For seven years, he did a stent as a University Professor of Finance and Economics.

Dr. Bauer also writes for SeekingAlpha.com. His articles can be viewed at: http://seekingalpha.com/author/steven-bauer?source=search_general&s=steven-bauer

He owned a privately held asset management firm and managed individual investor and corporate accounts as a Registered Investment Advisor - for over 40 years.

Professionally he is a financial analyst and private asset manager / consultant / mentor.

Steve can be reached at senorstevedrmx@yahoo.com

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