Precious Metals Not So Precious Now

10/22/2012 7:45 am EST

Focus: COMMODITIES

Peter Way

Founder and CIO, Peter Way Associates

Investors forget about the hidden carrying costs of precious metals, the stocks and miners, when looking to invest in this sector...which is cooling, not heating up, warns Peter F. Way of Block Traders' Oil & Gold Monitor.

Precious metals stocks and ETFs clearly are getting weary. The delusionary circus of the euro goes on and on, with no real fix being proposed, because none is politically acceptable.

Ultimately, some strong cadre of European nations may find value in bonding together by surrendering their national sovereignty, but the rest are all headed toward a fiscal disaster which may produce great destruction of property and possibly of people.

Syria provides a horrible example. The inevitable turmoil, when it finally arrives, will probably produce higher panic prices for precious metals, while the haves try to save what they had from the have-nots.

But precious metals have a carry cost, presented in a variety of ways. For present-day investments to be profitable, the social turmoil days need to arrive before the out-of-the-line-of-fire bystanders decide that the ultimate payoff is too far into the future to be worth waiting for.

Or perhaps enough of the bystanders might become convinced that somehow the smoke and mirrors might appear (at least to enough others) to be sufficiently complicated, impossible to fully comprehend, so that the illusion of credibility might last as much as a decade, and the “inevitable” chaos gets significantly further deferred.

In the US, there is yet the possibility that Fed actions to further attempt to revive the economy by additional monetary injections, under whatever name, could be emboldened by the reelection of the present administration. Still, that course of action is becoming increasingly less likely, regardless of the election results, as it becomes apparent that US balance of trade in energy matters is getting much better.

The action of XOM to export US-produced NatGas is a strong, clear signal that things are changing, and changing in a way that says worries about the acceptability of the dollar in world markets has little chance of supporting higher gold prices.

Should such conclusions become strongly suspected, gold and silver prices might slip lower. So far, there is no strong sign of that happening. But these investments are becoming more risky propositions.

The best potential data for a precious metals investment comes from Gold Resources (GORO), but because its implied forecast draws on a history limited to less than two years, the number of prior forecasts like today’s are little more than a dozen, providing a tenuous projection base.

Even in the exceptionally good average historical results, there are two realized losses (not just temporary drawdowns) in different time periods of over -33%. We would pass on any opportunity here.

The other precious metals candidate with historical credentials is the Proshares Ultra Silver Bull 2x ETF (AGQ). It has a wins ratio of two out of three on nearly 150 prior forecasts like the present. It also has a surprisingly good average maximum drawdown experience, given the leverage, of only -11%.

The time-disciplined results from these priors have generated 6 1/2-week net gains of 8.5% profits, or an annual rate of 87%. The opportunity seems to be there, but it is not our favorite buy recommendation today, despite its scale of past payoffs.

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