Panic Selling Or Panic Buying?

Back in April when there was a one day drop in the price of gold of about 10% there was definitely some panic buying going on. Here in the UK you had bunch of people who were apparently convinced that gold would never get that low again and rushed to the online dealers to buy some. There were so many customers at one point that the biggest online dealers refused to accept orders worth less than £500.

Things have calmed down now and there doesn't appear to be any panic buying going on, even though the price of gold is even lower now than it was in April. People seem to have accepted the fact that gold is actually on a downward trend (and has been since October 2012) and aren't buying it right now.

I think it is unique to the PM markets. Stocks and real estate are productive assets. With a stock you own a piece of a business that makes and sells a tangible product. You can live in a house or rent it to someone else. With productive assets you have metrics to judge the industry and see how your company or property stacks up against the competition. PM's are different because a PM like gold has no real practical use, you are simply betting on whether the rest of the world will be willing to pay more or less for it in the future.

There seems to be two schools of thought on PM's:

One group thinks the recent spike in PM prices are a sign of what is to come and prices will only go up from here. They see the decline in PM prices over the past couple of years as temporary. That is the group that rushes out to buy every time the price dips because they believe they are getting a deal. They also are advising others to buy now because you will never see these prices again.

The second group believes that the recent spike in PM prices is a reaction to the global recession and is only temporary. They see the decline over the past couple of years as proof that we are repeating the boom / bust cycle from the late 70's / Early 80's and can expect prices to continue to fall back to historical norms and then stagnate for decades. This group is advising others not to buy even as prices decline because the bust isn't over and prices are going to drop even farther.

We will see in time which group is right.

There are times when buying in a down market is a good thing. That applies a lot to stocks as a whole when the whole market is down, though it doesn't apply to every individual company. If you bought Wynn or Exxon when they bottomed out during the down market youre doing quite well, however if you bought MF Global or AIG on the way down youre seriously underwater especially for AIG which used to trade around 1100 and had several spots where a small recovery could have lead to dip buying.

Theres just no rule that applies across the board of you should always but x when y happens. Everything has to be analyzed individually for why y is happening. If its just a general pullback in everything from a slumping economy then it could be a great time to buy while people are panic selling, if its a weakness being exposed its best to stay away.

In the case of PMs there likely will be a time in the future where you could buy now and get your money back or more. The problem is that the price has been going down for a couple years now and in many ways repeating the trend of the 80s. If someone is willing to be underwater for years if not decades buying now from a face value standpoint would work out at some point. Overall though youd likely be down from lost interest and inflation where the money could have been better spent.

In that aspect PMs are almost the opposite of stocks. Most companies have a fundamental value and can raise their stock prices by improving their performance. Even in bad economic times individual companies can thrive, Beer stocks are through the roof for example. Then of course in good times theyll likely benefit from that too. With PMs though theres really nothing that they can do themselves to increase their value. They rely on either an insane jewelry demand or people to be weary of the current economy and rely on bad circumstances to really explode in price.

Thats a huge fundamental difference between the market and PMs which makes the PM price falls more of the market losing faith in the company going under rather than reacting to a bad quarter. The one time the buy when its down does apply to PMs would be in a booming economy when the prices have bottomed out like we saw in the early 2000s, especially if you start seeing wealth bubbles like an inflated housing market. That would be the time to load up with the hopes of making a large profit in a few years.




The panic is well represented in what we saw a couple weeks ago where everything was sold out.

You can say people were just waiting for the price to drop but in some ways it didnt. We see that it was panic buying and not just buying a dip from the fact that sellers started price gouging with premiums yet everything was still be snatched up. A 7 dollar spot drop led to a dollar or two price drop instead of the big drop we should have seen. Had the premiums been normal you could say it was buying a dip, but with the super high price gouging premiums it was clear people were panicking from the large spot change.

Foolish buying, panic buying, call it what you want. After the big drop on April 15th, every major online PM dealer was sold out despite huge premiums. I leave it to you to decide if those that rushed out to make those purchases were panicked or not, but it defies logic. Likewise, why aren't the dealers sold out now that PM's are at a new yearly low and premiums have declined? The difference is that from April 12 to April 15th silver dropped 14% and there was a mad rush by buyers of physical silver that were afraid they would miss the dip and prices would go back up if they didn't buy right away. You don't get that kind of rush when prices drop little by little, day after day.

Only time I panic when buying PMs is when I hit the pay now button..

Oh ya but that's part of the game, just like a new car, as soon as you sign those papers the value drops $3000 or so lol.

Not sure what the relevance is, but since I'm buying for the long term, of course I wouldn't sell for $25/ounce. Ask me again in 20 years.