Gold Price Volatility Peaks
Gold is a very special metal.
It has properties that make it useful as a natural money.
It's exceptionally malleable and one of the only natural-colored metals, making it ideal for jewelry and decoration.
It has great electrical conductivity, it's biocompatible with humans, it has catalytic properties, and it's completely resistant to natural corrosion — gold will never naturally oxidize or deteriorate in any other way.
Yet, for all its incredible features, the gold market is not immune to the coronavirus.
Riding Gold's Roller-Coaster Pricing
Growing fears over a global recession stemming from the coronavirus panic have induced levels of volatility in the gold market not seen in decades.
The CBOE's Gold Volatility Index — a measure of the market's 30-day expectation of gold's price volatility — is currently at its highest levels since the tracker began to tick.
CBOE/COMEX Gold Volatility Index (All data)
For gold to move 2% or 3% in either direction has become commonplace over the past few weeks. Heck, last week, the price of gold increased over $100 in one day, making it one of the biggest daily price movements in the yellow metal's history.
It is, without a doubt, the most exciting time to be watching gold since 2011. But while it's certainly exciting, volatility in gold prices really doesn't serve long-term investors well.
Of course, fast, steep declines in prices hurts the gold market. But fast, sharp increases aren't exactly great for the gold market over the long-term either. And that's simply because it puts the market at greater risk of a sell-off, which can scare investors away for years.
Look at what happened to the gold market through the 1970s, 1980s, and 1990s...
Following the end of Bretton Woods in the early 1970s, gold went into a bull market that lasted nearly a decade and ended in record highs for gold prices peaking at $850 an ounce ($2,670 an ounce, inflation-adjusted).
Gold (Inflation-Adjusted) 1968–1980
The whole market is remembered as one of the greatest bull markets in history. And every gold investor on the planet refers to the January 1980 peak as one of the greatest moments in gold investing history. But you know how long that peak lasted?
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On Friday, January 18, 1980, the price of gold went over $800 for the first time. Then, on the following Monday, gold peaked at $850.
A 60%+ decline in prices and a 20-year bear market.
Gold (Inflation-Adjusted) 1968–2000
Once the party was over, the long-term hangover set in.
Through the 1980s and 1990s, gold was virtually dead, strangling the mining industry and its investors.
Lofty gold prices are, of course, great for miners and their investors — but only if they're sustainable. Miners and their investors really should want stable prices that are high enough to support an adequate return but not so high to put the market at risk of a big sell-off.
During the bull market of the 1970s, gold miners got one really good year of sales. Then it was 20 years of losing money.
So volatility in gold prices, either big increases or decreases, really doesn't serve miners or their investors very well over the long term.
Volatility in gold prices also affects investors who own physical gold as a monetary asset for the same reason: A sell-off can sour investors for years.
But besides that, one of the key characteristics of good money is stability. So if anyone should want to see stable gold prices, it's monetary gold investors especially.
Same goes for safe haven investors. A safe-haven asset, by definition, is one used for protection. It's not a tool for leverage.
So while big price movements are exciting, most gold investors are really better off navigating calm waters. Though, the only thing we can do is hold on tight and see where the current takes us.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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