In our last exciting blogisode, I raised the topic of volatility —  the rate at which the price of a commodity or security changes — and how that applies to precious metal bullion, and more specifically, the gold futures market.. In this entry, I’ll continue in that vein.

In our favorite market, volatility varies according to the metal. As I mentioned last time, palladium has a high volatility; so does platinum. Silver is less volatile, but it still has some significant peaks and valleys on a percentage basis. Gold, however, tends to have low volatility — which is one of the reasons I value it above all other precious metals.

But let me emphasize the word tends: gold has been known to change in value quickly, as when it fell from the $850 range down to about $450 back in early 1980. That kind of volatility is rare in the gold market, though, and lately the volatility has remained low — even as the value has trended rapidly upward.

Let’s use October 2010 as a example. The value of an ounce of gold has varied from $1,320 on October 1 to $1,381 on October 14, whereupon it dropped back to about $1,340 over the course of several days. At COB on October 29, the final trading day of the month, the price of gold was $1,359.80.

So the maximum variance in the price of gold for October was $61, with the daily price bouncing between those extremes. That’s only a difference of about 5%. The most significant changes in day-to-day value amounted to no more than about $30 (up or down), about a 2.5% difference.

Yes, Virginia, that’s a very, very simplified analysis, because the complicated one makes my head explode. The point is that gold’s volatility is observably minimal, if noticeable.

Ultimately, volatility isn’t good or bad; what matters is how you time your sales and purchases. As the old saying goes, you gotta buy low and sell high, and you’ve got to be able to do it on the bounce.

Highly volatile commodities like palladium and platinum can be difficult to time properly unless they’re exceedingly liquid… which they aren’t, particularly. That’s another reason why I recommend that you buy gold rather than any other precious metal. Not only is it not particularly volatile, it’s reasonably liquid.

I’ll talk more on the subject of liquidity in another post, but tell me, what are your thoughts on volatility?  Please comment below.

 

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