If there’s one thing we precious metal investors need to understand, at least at a rudimentary level, it’s the concept of market volatility. You can’t let it upset you, you can’t let it spook you — and you certainly can’t ignore it.

Volatility is one of the basic characteristics of any traded commodity, and while economists can talk for hours about standard deviations and autoregressive conditional heteroskedasticity, it’s a lot simpler to understand than you might think. Basically (very basically), volatility is the rate at which the price of a commodity goes up and down. It can be measured in dollars or percentages.

Obviously, this concept has huge applicability in the precious metals market, since a metal’s volatility can determine how much you invest in a particular metal, or if you invest at all.

Take palladium, for example: it’s much less popular with investors than gold or silver, because its volatility is high. Not only does the price vary considerably over the long-term, it’s prone to extremes.

Case in point: the price soared to $1,100 per ounce in January 2001, but two months later, it was trading for $450. In the past few years, the price has dropped as low as $170, and tends to trend upward for a while before dropping abruptly to a low level. Right now it’s about $756, and it looks ripe for a correction, if history is any guide.

You can view a pretty good palladium chart stretching from 1977 to 2009 here: http://www.futuresbuzz.com/palladiumlt.html

As you can see, there’s been significant volatility in recent years; and that fact becomes all the more worrisome when you consider how thin the palladium market is anyway. Oh, it’s quite the useful metal… but it’s not as useful as the Big Three. This may explain why its value isn’t as high as one might think it should be, despite the fact that it’s so rare that it makes gold seem abundant by comparison.

And then there’s the fact that palladium can be created from scratch (in appreciable quantities yet) in a nuclear reactor — and who knows how that will affect its price as technology advances?

Gold is a much safer option, and we’ll take a closer look at it next time.

How important is volatility to you?  Does it keep you awake at night?  Please comment below.