The gold price is typically less volatile than most commodity prices.  This is because the depth and liquidity of the gold market, which are supported by the availability of above-ground stocks of gold in near market form, mean that sudden excess demand for gold can usually be satisfied with relative ease. As a result, gold is generally slightly less volatile than the S&P500.

Gold tends to become more volatile when the price is rallying, whereas with equities the reverse is true. So price volatility for gold contains different information from high volatility in equity markets, where it generally signals a crash or certainly nervous markets.

S&P and Gold: 22-day avge. volatility - 1971-2006

The downside risks associated with the gold price are very different from those associated with other assets, a factor that enhances gold’s attractiveness as a diversifier.  For example, should a central bank announce its intention to engage in substantial sales of gold, as happened prior to the Central Bank Gold Agreement in 1999, this would be unlikely to have an impact on equity returns but could reasonably be expected to affect the gold price in the short run.  Similarly, the specific risks to which equities are exposed, including exposure to the economic cycle, are not shared by gold. 

Gold is appreciated by many investors because of its ability to provide protection against certain risks that can be hard to quantify. Although the likelihood of some of these scenarios materializing may be limited, gold is valued as a hedge against geopolitical risk and uncertainty and because it can provide liquidity – depending on the form in which it is held – enabling investors to meet their liabilities when other assets may suddenly and unexpectedly become illiquid.  Gold is recognised globally as an alternative currency and can be used as a form of payment, reinforcing its longstanding role as a safe haven asset.

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