FINANCIAL advisers and wealth managers have warned that the recent collapse in the gold price, and its subsequent rebound, is a textbook example of a situation where retail investors all too often “turn a temporary paper loss into a permanent one”.
They advised investors not to panic and “get lost in the moment” but to focus on their time horizon and think rationally, not emotionally — and remember why they invested in the first place.
They also said acute price drops can be a good time for investors to top up if they believe in the asset class longer term and have sufficiently diversified portfolios.
Gold rose to over $5,630 an ounce last week then took a nosedive two days later, which continued into Monday, when the yellow metal briefly dropped below $4,500. As of Wednesday morning, gold has dusted itself off and is back above $5,000.
Equally, silver soared to as high as $122 over the past week and then fell to just above $72. As of Wednesday morning, it was back above $90 with many predicting it will soon climb to $100 and beyond.
Missing the wave
With gold and silver hogging the headlines, Samuel Mather-Holgate, Managing Director & IFA at Swindon-based Mather and Murray Financial, said many retail investors jumped in to ride the wave.
But he cautioned: “The problem with this is that investors often miss the wave and jump in at the precise moment it crashes.”
Many reasons have been given for the gold and silver crash — from investors simply profit-taking at scale to the appointment of a more hawkish US Federal Reserve Chair, Kevin Warsh.
Though according to David Belle, Trader at Fink Money, “the real reason gold and silver fell is because the Chicago Mercantile Exchange increased margin requirements on futures contracts”.
He continued: “This meant that to hold the same amount of contracts, there needed to be more cash in the account. Some large-scale investors therefore decided to de-levererage and hold fewer contracts.”
Discipline is vital
Whatever the reasons for precious metals plummeting in price over the past week, Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said the collapse underlines how investor discipline is key.
He said: “It’s very easy for retail investors to get lost in the moment. A sharp drop can feel like the start of a snowball tumbling down a mountain.
“My advice is that it’s important to remember why you bought an investment in the first place and what your time horizon is. If you’re speculating and looking for quick profits then a sell-off can be damaging but if you’re investing for the long term, sell-offs are inevitable.
“They can give opportunities to top up at a lower price. Discipline is vital as it helps you buy assets at sensible prices and hold on when things become a bit rocky.”
Diversification is key
Philly Ponniah, Chartered Wealth Manager at Philly Financial, added: “Sharp sell-offs trigger fear, and fear pushes people to forget why they invested in the first place. Price moves alone are rarely a good reason to sell.
“If the original case for holding an asset has not changed, reacting in the heat of the moment often turns a temporary paper loss into a permanent one.
“Diversification matters here, too. When people are over-exposed to one asset, volatility feels unbearable and bad decisions follow. Fast falls do not guarantee fast rebounds, so it is wrong to assume prices will always bounce back.
“But sharp drops are often driven by emotion, forced selling or positioning rather than long term value. That is why snapback rallies are common once the panic fades. The goal is not blind patience, it is having a plan, a time horizon and position sizes you can live with.”
From paper to permanent
Scott Gallacher, Director at Leicester-based Rowley Turton, agreed: “Sharp sell-offs as we have seen with gold are exactly when many retail investors do the most damage to their long-term outcomes by reacting emotionally rather than rationally. A paper loss only becomes a permanent loss when you sell.
“For investors with a well-diversified portfolio, invested for long-term growth and with no short-term need for the capital — perhaps drawing no more than around 5% a year — short-term market noise can usually be ignored, even if parts of the portfolio are uncomfortable to watch.
“That discomfort is often a feature of proper diversification: something will almost always be underperforming at any given time. Where investors get into trouble is when they lack diversification, have a short time horizon, or don’t fully understand what they own.
“In those cases, the key question isn’t whether prices have fallen, but whether the original investment case and fundamentals still hold — and whether the investor can cope financially and psychologically with further volatility.”
Risk tolerance
Psychology, specifically the inability to ride out risk, is something Anita Wright, Chartered Financial Planner at Ribble Wealth Management, warns many investors fall foul of.
She said: “Retail investors so often sell at precisely the wrong moment. They are not selling because the monetary reality changed overnight; they are selling because the paper market moved violently and their risk tolerance was revealed as theoretical.
“Most retail pain in these episodes is not because metals are ‘bad’ assets; it is because people own them in the wrong form, in the wrong size, for the wrong reason and then the paper market does what it always does during stress: it punishes the fragile.”
