You Missed The Boat On Precious Metals

April 28, 2016

Last July, I wrote about a contrarian case to buy precious metals equity (PMEs) funds. What a difference nine months can make.

Today I’m generally telling clients who ask me about them not to buy them. Let me first explain why I own them, and then explain why I’m telling people not to buy now.

Why I Own Precious Metals Equity Funds

I’ve owned PMEs for over a decade. In July, I noted that financial author and theorist William Bernstein stated that Ken French’s Precious Metals Equities series (spliced with the Market Vectors Gold Miners (GDX | C-76) return year-to-date) returned a dismal minus 0.13% real return from June 30, 1963 through July 27, 2015.

Thus, unlike gold itself, precious metals equities haven’t kept up with inflation.

But PMEs are more volatile than the metals themselves. A change in the metal price is magnified, which has a huge impact on the margins, since there is a cost in mining the metals. And the fact that PMEs have debt to service also makes them more volatile.

Yet that volatility, combined with low correlation to stocks, provides opportunities to buy low and sell high for those few who have the stomach to handle it.

Things Weren’t Looking Good

My contrarian case looked pretty bleak by the end of last year.

After my article published, the Vanguard Precious Metals and Mining Fund (VGPMX) lost another 12%, with the Van Eck Gold Miners Fund (GDX) doing a bit better, gaining about 1% for the rest of 2015.

On Jan. 26 of this year, I was on a precious metals panel at the Inside ETFs conference. The panel was sparsely attended. ETF.com Editor Drew Voros, the moderator, whispered to me that this was a good sign for PMEs, saying attendance is usually much higher for investments that had recently performed well.

What happened since that conference to date is what’s known as “regression to the mean.” As is typically the case, hot investments cooled off, and PMEs went from being as cold as ice to being on fire.

From the beginning of the year through April 25, VGPMX is up 52%, while GDX surged 64%.

Why Now Is Not The Time To Buy

To understand why I’ve cooled off on recommending them, I’ll refer back to what I said during the panel looking at fund flows into precious metal equity funds and ETFs that followed the metals.

Using the SPDR Gold (GLD | A-100) as an example, I showed how funds flowed into this once-largest ETF on the planet after gold had surged, and how funds flowed out after the decline. It’s only too human.

So, to be clear, I have no idea whether precious metals will surge or plunge for the rest of the year. Last July, I merely pointed out that it was unlikely that precious metals would continue to do so poorly.

Today I’m pointing out it’s just as unlikely that these investment will continue to surge as much as they have so far this year.

On the other hand, I have a very good idea that people will continue to chase performance in an endless loop of buying high and selling low.

Though it’s easy to say you’re not buying precious metals-related funds now out of performance-chasing, and that you will continue to hold and rebalance, practicing such discipline on an asset class that make stocks look boring and stable is rare.

Buy now at your own risk but, if you do, hold it for at least a decade or two.

Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine.

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