There are many investors today whose nerves are in tatters. After a very strong start to the year, especially in precious metals, things took a turn for the worse on Friday, 30 January, when gold got beaten down 9% and silver down 26% on the day. As a whole, the Resources 10 index was down 10%, almost halving the year-to-date performance. Crypto also took a huge hit with Bitcoin down 29% over a 7-day period as of Friday last week. Then we saw a bounce on Monday where things shot higher, just to be beaten down again mid-week. The Mag7 shares in the USA also dropped by 5%, not as bad as gold, silver and crypto, but this is on top of an already weakening valuation.
As South Africans, we saw the rand weaken to around R16.20/US$, reminding us that our currency can move both ways. The good news is that these bouts of volatility are not unusual and we have them every year. We also have to accept that if something goes up so high and so fast, Newton’s Third Law of Motion (action and reaction), will follow. Regardless of what will happen over the next few weeks, we have to learn from the volatility we experienced last week.
One of the key takeaways is that if you are late to the party, don’t chase the elevated prices, meaning, don’t get FOMO and buy in at the top. If you have missed some spectacular rise in some investment, let it go. Another takeaway is the difference between investing in companies and investing in things like gold and crypto. When you invest in a company, you can value that company based on what it produces. You can calculate the fair value of that company and even if the price of that company comes down due to sentiment, you have a very good chance of making a profit on it eventually. In gold and crypto you have no way of valuing it. This can cause a lot of uncertainty about the potential recovery of a loss, and you don’t get any yield while you wait. To ease the tension, we saw a sharp rally in almost everything to end off the week!
As we have mentioned before, be reasonable in your expectations of returns, and trust the process. If you have been invested in equities, precious metals or even crypto, you handsomely outperformed cash and inflation over a 5-year term. There are very good fundamental reasons for equities to continue giving you good returns, and over the shorter term, precious metals are still supported by geopolitical risks and changes in the world order, so hang in there.