Volatility of Gold

EXCLUSIVE

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1. The price of gold, as of every traded asset, is subject to the ups and downs of the market

2. The rate of this precious metal can fluctuate fundamentally

3. The volatility of gold must be a concern to all short- and long-term investors

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1. Gold’s value is shaped by demand and supply

2. The factors are gold production by gold mines, central banks, investors and the industry (jewelry, electronic etc.)

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1. Thinking that it is possible to exactly calculate and predict the gold price is plainly wrong

2. There are many factors that influence the price, but cannot be predicted

3. Such as the discovery of new gold deposits, and natural disasters that destroy gold mines

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1. Other factors that make the gold price unpredictable and volatile:

2. The interplay of the international financial system

3. Inflation and interest rates 4. Alternative investments5. The irrationality of investors

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1. In average (especially since the beginning of 2000) the gold price has been risen

2. This is because of the increased demand in emerging market (predictable),

3. Central banks that stepped up their reserves gold reserves (partly predictably) and the financial crisis which made gold a more attractive investment (unpredicted by most)

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1. The 10-year upward trend of the gold price asks for caution

2. First, gold is now at an all-time high

3. Thus, investors who buy gold now do it when the price is as high as never before. Is this a wise move?

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1. Second, history tells us that the gold price can fall, and stay down for extended periods

2. If someone had bought gold in 1979,

3. that investor would have to wait for thirty years until the gold price had reached the same level, so that a sell would not result in a loss (not considering inflation and opportunity costs)

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1. Third, oil is in many respects similar to gold:

2. both are popular commodities among traders, both are finite resources, extraction is costly and difficult to replace

3. The recent history of the oil price should be a warning of the volatility risk of this commodity, and of all assets

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1. Oil stood in the beginning of 1999 at a low of US$ 19 per barrel

2. In July 2008 oil was at US$ 147. Within one year the price fell to US$ 34

3. This is an unprecedented drop of 77 per cent within just twelve month

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1. Could this also happen to gold? 2. How to know when the gold

price has reached its peak?

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1. The volatility of gold is a market risk

2. Another market risk is the liquidity risk

3. This occurs in thinly traded markets, where sellers have difficulties in finding buyers

4. Futures of not actively traded contracts might run into this risk

5. Shares of small stock mines might also face liquidity problems

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