Here’s Why Gold is More Unpredictable Than Ever
Gold has been highly volatile of late, most recently spurred on by the Swiss National Bank’s decision last week to peg the franc to the euro, which left investors with one fewer safe haven from roiled markets. Lately gold has been trading in a more than $100 range, around $1,800 an ounce.
“I think the market will go higher, but a $100+ correction cannot be ruled out, especially if the dollar decides to strengthen even further,” said Saxo Bank senior manager Ole Hansen. “A pretty strong stomach might be required short-term.” It’s not uncommon for gold to dramatically increase one day only to pare the previous day’s gains, and then some, the next.
These extreme price movements are, in large part, the result of the euro zone’s seeming inability to deal with its debt crisis, which has spread from relatively smaller economies like Greece, Portugal, and Ireland, to the single-currency region’s third and fourth-largest economies, Italy and Spain.
Another factor in gold’s extremes are U.S. economic indicators, lately pointing to slowing growth that the Federal Reserve is becoming less able to combat than in the past.
While these problems have been positive for gold in the past, driving it to record highs above $1,920 an ounce earlier this month, with prices that high, investors are looking at extreme uncertainty and “substantially higher volatility”, said Natixis analyst Nic Brown. “It is simply the dynamics of the financial markets – they just become inherently more volatile as you rise to what are ultimately unsustainable peaks.”
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Between gold’s highs and lows this year, there is a more than $600 gap, the largest since the 1960s in absolute terms, though its 32% range is below the 42% range seen in 1980. One interesting new development: gold has become more likely to move in tandem with equities than before. Historically, gold prices have tended to rise only when markets were down, and vice versa. Furthermore, it has broken its traditional correlation to assets like the dollar, making its moves more unpredictable.
But though volatility has increased, and they seem to be in bubble territory, gold prices have yet to crash. The rising cost of owning gold, and the greater risk of holding it, has not deterred buyers. As currencies, commodities, and equities remain even less predictable, gold is still seen as a good bet.