Avoid a Herd Mentality When it Comes to Both the Stock Market and Buying or Selling Coins
Acceptance is a powerful motivating factor that affects many aspects of our lives. We all want to be accepted, and we want those around us to affirm that we’re making wise decisions. If we break with the crowd and take a more contrarian approach, it can be quite lonely, as few dare to venture into these waters. However, those that choose to go against the grain over the long term tend to be rewarded.
Investors are notoriously horrible market timers. While the stock market has on average returned 7% on an inflation adjusted basis over the long term, investors’ returns have been nearly half this amount. This is because people tend to invest at the wrong time. It’s only when investment opportunities begin to make the headlines, such as new all-time highs in the price of Tesla or Apple, that people decide to jump in. Afterall, no one wants to be left behind. This is commonly known as FOMO, or fear of missing out. Afterall, when everyone else at your dinner party is talking about their Tesla stock and how well it’s doing, you want to be able to participate in these discussions.
Unfortunately, once an investment opportunity makes the headlines, it has likely already run up significantly in price with most, if not all the upside returns already captured. In other words, many investors tend to invest on a high basis or valuation, which means that future returns will likely be lower, if not negative. I personally fell into this trap in 1999 when I loaded up on large growth mutual funds from Janus, which most of the 90s had been returning 25% – 30% annually.
The same issues that plague stock market investors also tend to influence the decisions of gold and silver investors. While this crowd tends to be a bit savvier than your average stock market investor, as they have a firmer grasp on economics, they are not impervious to many of the biases that plague stock market investors. It’s not uncommon for precious metal investors to buy gold and silver coins when they’re expensive and sell them after a significant pullback. When you feel like it’s time to throw in the towel is most likely when you should be loading up on an out of favor asset class.
As an example, up until recently, American silver eagle premiums were trading at upwards of $20 a coin. At one time, the premium was above the spot price of silver, making it over 100%. There were valid reasons for the premiums being elevated, as the U.S. Mint shutdown for a period of time. Furthermore, when they reopened, the Mint had difficulties sourcing planchets on which to strike the coins. These issues, along with unprecedented demand, pushed premiums to stratospheric levels. As coin dealers, we had difficulties keeping up with demand and sold these coins as soon as we acquired them.
Fast forward a few months where premiums have dropped by 50% or more and there’s substantially less demand than when premiums were double the current rates. While still a bit elevated on a historical basis, you would think that the premium relief would bring in a new wave of buying, which has not been the case.
This is in part because the general public is distracted by what they perceive as good news regarding the economy. The stock market has performed well as of late and the headline inflation number has dropped significantly from the peak of 9.1% in June of 2022. Of course, the relative calmness in the markets and the sense that the Federal Reserve has put the inflation genie back in the bottle is only a temporary phenomenon.
The reality is that we’re likely heading for a recession (the yield curve has been inverted since October 2022). We’re also beginning to see a collapse of the commercial real estate market with substantially lower sale prices, higher foreclosure rates and bankruptcies. Furthermore, the banking crisis that began earlier this year is likely just the tip of the iceberg for an industry that is overleveraged and is sitting on government bonds that are only worth a fraction of their face value. This is because the banking sector acquired treasury bonds at rates that are significantly below those currently being offered in the market. Read more about these here.
Fundamentals are pointing to a weaker economy, weaker dollar and higher gold and silver prices. Of course, we’re happy to sell coins and bullion when prices are high and premiums are elevated but do yourself a favor and buy when inventory is plentiful and prices are reasonable, as the eye of the hurricane will soon pass leading to a tighter market.