Gold unusually volatile, bounces 1% after sharp falls

After a sharp fall of 4.5% on Sept. 7, London Gold Market Fixing Limited PM fix price rebounded 2.5% the next day. Since early August, gold price has been unusually volatile, seeing 11 days of up or down move of at least 2%.

But should current volatility set your heart racing? LBMA and BullionVault studied the long-term gold price volatility. The daily volatility smoothed out as a rolling one-month average surged to 1% in early 1980s, 0.5% after Lehman collapsed in 2008 but only ranges between 0.1% to 0.2% recently. Since 1968, the first year London set its gold price in USD, the average year-over-year change was 12%, but the standard deviation of that change was 29%, which is quite large. The Z-score (the year-over-year change minus the historical average divided by standard deviation) was eight at the peak in 1980, but currently this score fluctuates around 1.3, well-below the critical level of two for a “bubble” territory.

Market tends to react to positive global economic news by buying up risky assets and selling safe-havens such as gold and bonds, as we saw on Sept. 7. Credit Suisse analyst still believes the medium-term uptrend of gold is intact. The recent price rally from early July level of $1,500 could be faster than what the fundamentals dictate so the price could retrace to mid-$1,700 for the uptrend to continue.

The ECB left the benchmark interest rate unchanged in their Sept. 8 meeting, clearly indicating they have become worried about more downside risks for their banks and economies. The Swiss National Bank decision to buy unlimited amount of euros against their currency to keep EUR/CHF at 1.2 means that safe-haven assets are becoming limited, which is bullish for gold, prompting investors and central banks to continue to buy gold on dips.

Robert Jilles is an analyst at the London-based gold broker Sharps Pixley Ltd.

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