Gold’s volatility characteristics are often misunderstood. Many people tend to equate the behavior of the price of gold to that of other commodities, which often are very volatile. Oil, copper, and soybeans, for example, have had annualized volatilities of 41.2%, 25.0%, and 23.1%, respectively, over the past twenty years (based on daily returns from January 1990 to December 2009).

The volatility of gold over the same period was just 15.9%. Overall, commodities, as measured by the S&P Goldman Sachs Commodity Index, were over 35% more volatile than gold over the past twenty years. There are good reasons why gold is less volatile than other commodities. First, the gold market is deep and liquid and is supported by the availability of large above-ground stocks. Because gold is virtually indestructible, nearly all of the gold that has ever been mined still exists and, unlike base metals or even other precious metals such as silver, much of it is in near-market form. As a result, in the event of a sudden supply-side shock or rapid increase in demand, recycled gold can, and frequently does, come back onto the market, thereby dampening any brewing price spike.

The second reason rests in the geographical diversity of mine production and gold reserves. These are much more diverse globally than other commodities, leaving gold less vulnerable to regional or country-specific shocks. Contrast this with oil for example, where the price will often be aggressively driven by economic or political events in the Middle East, Eurasia, and Africa – regions where geopolitical risk is usually comparatively high (Chart 3). Similar examples can be found in metals: close to 50% of palladium’s production comes from Russia, and 78% of platinum’s production comes from South Africa.

Gold has, in fact, been slightly less volatile than major stock market indices such as the S&P 500 over the past 20 years. The average daily volatility from January 1990 to December 2009 for gold was 15.9% per annum compared to 18.4%annual volatility for the S&P 500 over the same period (Chart 4). Even if 2008 and 2009 are excluded from the equation, given the unusually high levels of volatility experienced by most assets during that time (the average daily volatility of the S&P 500 jumped to 41% in 2008, while gold's average daily volatility rose to 31.6%), the S&P 500 was still 10% more volatile than gold on average.