Individual investors seem to get sucked in after prices trend up.
I’ve had two friends ask this week if it’s a good time to buy gold.
Of course, they as after gold at a new high over the past year.
Although looking at the gold price since 1980, it hasn’t reached the high it did about seven years ago.
The fact the price is still below the peak price it reached late 2011 is an observation of the downside risk of investing in gold. Since the 2011 gold rush, the gold price gradually trended down over -40%.
Part my ASYMMETRY® investment strategy is to consider what I call the ASYMMETRY® Ratio, which is the total return over a period vs. the downside risk it took to achieve the return. My objective is asymmetric risk-reward, so we want asymmetric risk-reward profiles whereby the total return is multiples greater than the drawdown we have to experience to achieve it. The Asymmetry® Ratio is a ratio between profit and loss, upside vs. downside, or drawdown vs. total return. The bottom line is, it doesn’t matter how much the potential return is if the possibility of loss is so high you tap out before its achieved. So, we necessarily have to understand the asymmetric risk reward.
Is gold a good buy right now?
It depends on many factors, such as the personal objectives and portfolio management system.
If it’s someone just thinking of buying it arbitrarily as one said “because the stock market looks risky”, gold doesn’t necessarily look any less risky when I compare the trends.
If buying gold is part of a trend following trading system with risk management, then maybe the system enters it and uses the prior price low as an exit. In that case, the “risk” is defined by the difference between the current price and the prior low, which is 7% lower, rather than risking it all.
The exit, not the entry, always determines the outcome.
What I mean is, it doesn’t so much matter when we buy something because we never know for sure in advance if it will go up or trend down. So, it’s what we do after we buy something that determines the outcome. And, if you just buy and hold without a predefined exit, then you’re risking it all.
You can probably see why I predetermine my loss in advance, should a price trend down. I want to cut it short, rather than risk it all. So, my risk is determined by my exit point, not what I’ve invested in.
Beyond that, gold has strong momentum as evidenced in the chart, but looks overbought in the short term, so it may pull back some. If I wanted to buy it (I don’t at this time nor do we own it) I would decide my exit based on the risk I’m willing to accept and let it rip.
We never know the outcome in advance, so I don’t focus on trying to be right all the time. I instead focus on how much money I’m willing to put on the table to see how it unfolds.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.
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