Decoding the Psychology of Gold and Silver Investments

In trading, psychological support or resistance price levels are a clearly observed phenomenon – usually tied to a distinct round number, such as $60,000 for Bitcoin in the current market.

Investing, whilst usually reliant on technical and fundamental analysis, also involves emotion and psychology, sometimes to great extents. An excellent example of this is the Fear and Greed Index, seen below:

Rather than framing the market as bullish or bearish, we can look at it as being fearful or greedy, and this chart uses data to discern current market sentiment.

Exploring Risk Aversion in Precious Metal Investments

Individual investors have risk tolerances that vary wildly: some might like to invest in the riskiest cryptocurrencies like memecoins, whilst others might only invest in stocks and shares or gilts.

One thing most investors would agree upon is that precious metals are widely recognised “safe haven” assets, hedging against inflation and proving to be useful stores of value over time, considerably less volatile than our fiat currency alternatives.

Thanks to Kinesis, gold and silver can even be used as money. Let’s look at why risk aversion factors into the psychology of precious metal investment:

Hedging against inflation: most citizens around the world are starting to learn – especially post-pandemic money printing – that keeping cash in the bank is a risk, as it deflates away into nothing, eaten by inflation. Owning assets with proven value such as gold and silver helps hedge against inflation by protecting and preserving wealth, helping investors manage their risk.

Tangible asset: You cannot physically hold a stock or a share the way you can a gold coin or bar, and some investors love having a physical asset with tangible value in their home – this may become especially relevant in the United States where many states are now legislating gold and silver as money. 

In-built value: Thanks to the industrial and retail use cases of gold and silver (jewellery, for example), not to mention the cost of mining and production, precious metals can never be without value, and classic economic principles of supply and demand apply – driving prices in one direction over time. 

Lower volatility: Whilst not without volatility, relative to fiat currencies, gold and silver have been evaluated as closer to “sound money” than the fiat currencies issued by central banks. Precious metals can be used as a store of value, a medium of exchange and a unit of account, whilst thanks to inflation, fiat is no longer an effective store of value. Risk-averse investors know this, and will hold their wealth in gold and silver instead of in fiat. 

Diversification: Investors looking to manage their risk will typically diversify their portfolios, and include precious metals as part of a strategy that may also incorporate real estate, stocks and shares, cryptocurrencies and more. 

Bandwagon Effect in Precious Metals

The bandwagon effect describes a situation in precious metals investing where people buy into the market simply because others are doing so,  rather than basing their decision on thorough analysis. 

Caused by such things as social media hype, celebrity endorsement, persuasive advertisements and more, the bandwagon effect often comes too late to be impactful for the savvy investor.

The bandwagon effect is an example of herd mentality where investors get caught up in the excitement and positive sentiment surrounding a particular precious metal, overlooking potential risks.

These risks could include:

• Buying at the top and making a loss
• Suffering from extreme volatility as everyone else buys or sells
• Not understanding the asset due to lack of research and failing to use it well

Overcoming Loss Aversion Bias 

Loss aversion can have a paralysing effect on less experienced investors, especially if previous results were negative, but there are ways to overcome this that are simple and should be remembered:

Stay positive – you’re taking an important step towards preserving and protecting your wealth. 

Have a plan – decide whether you’re looking for short-term gains or a longer-term wealth generation strategy. It can be useful to look at a price range to trade in, including stop less and take profit levels. 

Identify likely worse-case scenarios – this will help ascertain whether you should be investing in the first place. Remember, never invest more than you can afford to lose! 

Know when to exit – apart from Microstrategy’s plan for Bitcoin, which is simply to “never sell”, even the longest-term investments typically have an exit date. For examples, just look at when people sell shares. 

Other Biases in Investor Risk Assesments

There are many more biases that can affect the mental state of even the most seasoned investors, so having a working knowledge of each will help disarm them:

Overconfidence – past success or much time spent researching can lead investors to overestimate their own abilities and take much bigger risks than they otherwise might have.

Anchoring – this is a bias that occurs when an investors holds on to the first piece of relevant information they encounter, whether it is accurate or not!

Disposition – this bias causes investors to simply hold on too long to losing assets, whilst selling winners too early, trying to break even. 

Confirmation – this is when investors seek information that supports their previously-held views. 

Recency – this bias leads investors to look only at the most recent events related to their chosen assets. Remember, when in doubt, zoom out! 

Self-attribution – this bias occurs when investors blame external factors for poor results, whilst giving themselves the credit for positive ones. 

Emotional Drivers in Bull vs Bear Markets

Beyond biases, common and complex emotions also drive investor sentiment in bull and bear markets – we’ve already looked at fear and greed.

Other emotional drivers include optimism and euphoria or joy in bull markets, and despair in bear markets. Euphoria tends to bring new investors and new money to established assets, whilst despair can cause investors to lose faith and withdraw completely, especially if the bear market is protracted. 

Strategies to Minimise Emotion-Driven Investments

There are a number of effective ways to minimise – if not completely eliminate – emotion from investing, and some of these include: 

Seeking high-quality educational resources – rather than getting an education, educating oneself with the plethora of useful resources available online is paramount for anyone looking to invest in precious metals. Crypto investors call this DYOR: do your own research.

Dollar-cost averaging – for the long term, dollar cost averaging (DCA) has been seen to provide good results, and removes much of the stress from trying to time the market.

Automating trades – especially if DCAing in and out, automating these trades removes the immediacy of doing it manually, and can help manage the emotional aspect of investing. 

Don’t obsess – it is crucial not to constantly check portfolio balances and the latest news, as this will have a negative impact on mental health and could affect investment decisions. Take breaks! 

Have an accountant or mentor (or both) – access to an expert who can give you sound advice and has more experience than you can be profoundly beneficial even for veteran investors. 

Psychology-Driven Trends in Gold and Silver

As we can see, there’s a large amount of psychology driving investment trends in gold and silver, but with the precious metals bull market in full swing, thankfully it’s more likely to be optimistic than despairing.

To recap, it’s important to both be aware of, and take steps to limit the impact of the psychology that drives investment in gold and silver. 

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.