Why Gold is so Volatile: 3 Reasons for Gold’s Unpredictable Prices

Posted - November 24, 2023
Why Gold is so Volatile: 3 Reasons for Gold’s Unpredictable Prices

Some new gold investors believe that gold is a stable investment. This is true, but maybe not in the way you think. In the short term, gold is actually extremely volatile. Countless stackers have tried their hand at trading gold on a short timeline, and many will lose their money just as quickly as they spend it. 

In the long term, however, gold tends to be one of the most stable commodities – at least where the 21st century is concerned. To explain why gold is so volatile, we’ve taken some time to research a few reasons why this particular asset has such a shaky reputation as a short term investment. 

Volatility Defined 

Before we can get into 3 reasons why gold is so volatile, we need to understand a bit more about what volatility means. Seasoned investors, feel free to skip ahead to the next section. But for the newbies out there, let’s do a very brief crash course on defining commodity volatility. 

Volatility refers to the aggressiveness of price swings for a given asset. When investments like gold or some stocks frequently have violent increases or decreases in value, we call them volatile assets. Gold is considered a short term volatility because it experiences violent price swings during small, isolated periods of time. 

What Does Gold Volatility Mean? 

Gold’s volatility refers to its reputation as an asset that can change in value quickly – usually with little or no notice at all. Gold isn’t the only volatile asset. Other precious metals like platinum and palladium can also be volatile, especially in the short term. 

In order to properly explain why gold is so volatile, we’ll turn our attention to an important measure of gold’s volatility: the gold volatility index. 

Gold Volatility Index

The volatility index is a tool used by the Chicago Board Options Exchange (CBOE) to track the expected volatility of returns on a given stock. In this case, gold’s volatility index refers to how much experts anticipate the commodity to shift in price throughout a given day. In other words, this is how the experts of the finance world understand why gold is so volatile. 

A relatively good measure of gold’s volatility is pretty easy to figure out. If you take the highest value of gold on a single trading day and subtract the lowest, you have a rough estimate of how volatile gold was during that day. 

Why Gold is so Volatile

Finally, it’s time. Let’s take a look at 3 reasons why gold is so volatile. Gold’s volatility is caused by unpredictable supply and demand dynamics, an easily swayed market sentiment, and very few (or no) strong price movement indicators. When they combine, these factors help to explain why gold is so volatile. 

Unpredictable Supply and Demand 

Explaining why gold is so volatile requires us to understand supply and demand dynamics. As much as we’d like to believe that the world will always have as much gold bullion as it needs for investors, this is far from the truth. 

Valcambi 1 oz Gold Bar
Valcambi 1 oz Gold Bar

The reality is that all sorts of unpredictable factors can influence the global supply of gold. Embargos, bans on mining, and all sorts of political drama can lead to a diminished – or drastically increased – supply of bullion. 

Demand can be equally unpredictable. When bullion dealers try to adjust to the market, they might naturally decrease their demand for physical gold. The same is true for government mints, who make up the lion’s share of global demand for gold bullion. 

In either case, an unpredictable measure of supply and demand is part of why gold is so volatile. 

Easily Swayed Market Sentiment 

If you’ve been around the gold stacking space for long enough, you’ll know exactly what we’re talking about here. Because gold’s price is often correlated with anxiety and fear about the traditional economy, the market can move quickly and violently, resulting in volatile price swings. 

This is nothing new, either. Some shady gold dealers in the past few decades have used high pressure sales tactics to drive consumers to buy up gold, sending its price sky-high. And when enough people have bought into a given market, the leaders of the scheme sell off all of the gold – which drives prices back down. Because market sentiment helps drive asset values, the fickle nature of the gold market explains why gold is so volatile in the short term. 

2023 1 oz American Gold Eagle Coin Reverse
2023 1 oz American Gold Eagle

No Strong Price Movement Indicators

The final reason why gold is so volatile is that it’s just hard to predict the price of gold. This might seem a bit confusing. How can gold’s volatility be caused by a perception of volatility? It’s important to remember that quite a bit of investment is driven by speculation. When the value of a stock skyrockets, it might very well be the case that a large group of investors became “bullish” on that stock. 

But gold is tricky, because it doesn’t necessarily correlate directly with any given indicator. For something like a tech company’s performance, it’s reasonable for prices to climb via speculation after a new innovation comes out that makes it easier for that company to do an important task. 

Because gold’s price isn’t directly tied to the performance of any specific company or group, it might be volatile in the short term. Think of gold’s short term volatility as a symptom of investors trying to “find their footing” and figure out where the market stands. 

Final Thoughts: Why is Gold so Volatile? 

So why is gold so volatile? Over the past few decades, gold has earned a complicated reputation with both investors and financial advisors. On one hand, gold has demonstrated a solid long-term price appreciation, and it continues to trend up in the long term. 

But there’s another side to gold. It’s a side characterized by violent price swings, confusing shifts in market sentiment, and an unpredictable short term outlook. For this reason, many experts tend to call gold a volatile commodity in the short term – and a solid investment in the long term. All of these factors help to explain why gold is so volatile. 

Where does this leave you as the average gold stacker? The good news is that gold’s reputation as a long term investment is still strong. Hundreds of thousands of gold stackers around the world have built an impressive portfolio of gold coins and bars that continue to become more valuable as time passes. 

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About The Author

Michael Roets is a writer and journalist for Hero Bullion. His work explores precious metals news, guides, and commentary.