Published March 04, 2012

This Is What Volatility Looks Like

Dear Readers,

Greetings from the Prospectors & Developers Association of Canada annual meeting in Toronto, Ontario, the biggest annual conference in our industry. It will be interesting to see what all the best geologists, engineers, mine finders, and mine builders have to say about our markets today. Metals, mining, and money – this is the place to be to learn about these things.

Next week, I'll report on what I learn here. For this week, we have an excellent article by BIG GOLD's Jeff Clark on putting last week's correction into context. On that subject, I'll add that the correction hit just as I was finishing up with this month's issue of Casey International Speculator; I told subscribers that as soon as I was done writing, I'd go down to my local coin shop to see what I could buy. Turns out, I was far from the only one with that idea, and my favorite dealer – who always has stock – was completely out of silver bullion and was down to his last two ounces of gold… a couple of Canadian maple leafs. I bought them both.

More from the Great White North soon.


Louis James

Senior Metals Investment Strategist
Casey Research

Rock & Stock StatsLastOne Month AgoOne Year Ago
Gold Producers (GDX)54.7957.4760.79
Gold Junior Stocks (GDXJ)27.7130.1939.69
Silver Stocks (SIL)24.9525.2227.75
TSX (Toronto Stock Exchange)12,643.8212,553.4814,144.02
TSX Venture1,678.901,660.572,402.02

This Is What Volatility Looks Like

By Jeff Clark, Senior Precious Metals Analyst

Last Wednesday, February 29, gold dropped 4.8% and silver 6.2% (based on London fix prices). That's quite the fall for one day. We've seen prices that have risen that much, too. But as I'm about to show, these ain't nothin', baby.

Based on our experience, we've been saying for some time that volatility will increase as the markets fight their way to the mania phase of this cycle – and that once there, the gyrations will jump even higher. This call doesn't exactly require one to go out on a limb; it makes sense since more investors will be crowding in – and volatility was high in the 1979-'80 mania.

First, let's put last Wednesday's big plunge in perspective. Here's a picture of the daily changes in the gold price since 2003, based on London fix prices. (This chart is very busy, but I want to show the bulk of the bull market in one visual.)

(Click on image to enlarge)

A 4.8% decline is one of gold's bigger one-day movements over the past nine-plus years. But as you can see, there have been a number of days where gold rose or fell more than 5%. And it exceeded 6% on five occasions.

Here are the data for silver.

(Click on image to enlarge)

Last Wednesday's decline of 6.2% was one of the metal's bigger one-day movements. However, it's exceeded 10% on 14 occasions, 15% three times, and rose an incredible 20.06% on September 18, 2008.

You might think this kind of volatility is high – and it's true. Worse – or better, depending on how you see things – the volatility in the underlying commodity is magnified in the related company stocks. This is why Doug Casey calls mining stocks, especially the juniors, "the most volatile stocks on earth." But the thing is, metals volatility has been higher in the past, particularly during a mania.

Here's what I mean.

The following chart documents gold's daily price changes from 1976 through the end of 1980. Take a look at the jump in volatility in 1979-'80.

(Click on image to enlarge)

Volatility became the norm in 1979 and especially 1980. Fluctuations of 4% or more were not uncommon.

Here's the same chart for silver. The metal's volatility during the 1979-'80 period became extreme.

(Click on image to enlarge)

Daily price movements of 6% or more didn't occur once prior to 1979 – but then they became commonplace.

I wanted to take a closer look at the biggest price fluctuations during this period, so I ferreted out the largest days of volatility for each metal. For gold, I selected daily movements of greater than 5%.

(Click on image to enlarge)

During this five-year period, gold saw fluctuations greater than 5% on 38 days (19 up, 19 down). Not surprisingly, more "up" days occurred leading up to gold's peak of January 21, 1980, and more down days came after it.

And yes, gold rose an incredible 13.3% on January 3, 1980. As it turned out, that biggest one-day rise was only 18 calendar days away from the very peak of the market. And the biggest decline of 13.2% on January 22, 1980 was the signal that the top was in.

For silver, I used one-day movements of 10% or more, all of which occurred in 1979 and 1980.

(Click on image to enlarge)

The silver price had fluctuations of 10% or more on 34 days (17 up, 17 down). They occurred over a period of only 15 months, an average of more than two per month.

And yes, silver really did rise a whopping 36.5% on September 18, 1979.

So while last Wednesday's price movements for gold and silver were big, we simply haven't seen this kind of volatility in our current bull market.

Now let's have some fun. Let's say we match the most volatile days from 1979-'80 at some point before the current bull market is over. If we use gold's biggest up day (13.3%) and biggest down day (13.2%), here's what would happen to prices from various levels. Remember, these are one-day gains and retreats:

Gold Price

Imagine gold jumping from $1,800 to $2,039.40 in one day!

However, unless you think $1,800 is the level from which the mania starts, it's more likely we'd see a 13.3% advance (or something similar) from a higher starting point. We'd thus probably see gold jumping to $5,665 from $5,000, for example. And further, that would probably signal we're near the top.

Keep in mind that volatility worked both ways during the mania, so dropping from $4,000 to $3,472 or something similar is likely to occur as well.

Here's the same table for silver, with its biggest up day of 36.5% and down day of 18.5%.

Silver  Price

Can you imagine silver starting the day at $80 and hitting $109.20 before you go to bed that night? Something like that will probably happen at least once before this bull market is over. As with gold, though, that kind of movement is more likely to take place from a higher level, such as $100 or $125 (or higher?). And a fall like $100 to $81.50 will probably be part of the trend as well.

There are some definite conclusions we can draw from the historical picture:

  • First, if history repeats, or even rhymes, our biggest days of volatility are ahead. And they will be normal.
  • Second, big price fluctuations will be common as we enter the mania and approach the peak. In fact, when large daily movements become the norm, the historical record suggests we will be nearing the end of the cycle.
  • Third, since current volatility has thus far been lower than what was experienced during the final phase of the 1970s bull market, we are not in a bubble, nor yet in the mania phase, and nowhere near the top. Remember that the next time you hear some nincompoop spew bubble talk on CNBC.

What can an investor do with this information? Prepare yourself for bigger daily swings – in both directions. And buying on those outsized drops is probably a good strategy…

Because we now know what volatility looks like.

[Believe it or not, volatility is even greater in the junior resource sector, where many opportunities abound to see doubles and triples on your investment. This is especially true of juniors that are ripe to be bought out.]

Gold and Silver HEADLINES

Volatility Creates Buying Opportunity (Reuters)

"Gold fell 5 percent to below $1,690 an ounce on Wednesday, February 29, for its biggest one-day drop since October 2008. This decline came after the US Federal Reserve Chairman Ben Bernanke gave no hints of a third round of quantitative easing. ... Trading volume exploded when speculation about an unusually large sell-order ran rampant. Option traders said funds were heavy buyers of puts to protect against further losses."

Further news came from India, China, Hong Kong, and other Asian countries that "physical gold market witnessed a buying frenzy as jewelers, traders and investors rushed to take advantage of the nearly $100 drop in prices overnight, helping to boost prices." The next day, March 1, gold rebounded to US$1,720/oz level.

As per our main article, since long-term fundamentals for gold remain unchanged, weakness like this is perceived as a good window of opportunity for those who want to buy gold and silver at attractive price levels.

Iran to Use Gold in Foreign Trades (PressTV)

Subject to sanctions from the US and EU, Iran is looking for alternative ways to trade and made yet another step in promoting gold as money. Just recently, Iran was reported to be bartering gold for grain. Now, the governor of the central bank of Iran, Mahmoud Bahmani, declared that the country can receive gold in its transactions instead of currency transfers. "In case a country is willing to pay for the price of its imports from Iran in gold, there is no problem in this respect."

If events in your personal life went to your worst-case scenario, would you own enough gold to pay for food?

Everything You Need to Know about Gold (Business Insider)

Business Insider provides an interesting compilation of facts and figures about gold and whether it is in a bubble or not. The infographic is well worth a look.

This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

International Speculator

  • A company with a large, high-grade gold deposit recently saw its shares plummet due to a number in an economic study that we believe many investors are not seeing in context. This looks like a great buying opportunity to us. See our recommendation.
  • We are closing our position on a stock while it's up, as both technical and political risk seem higher. Read our full explanation.


  • The March issue of BIG GOLD is due out tomorrow, and we have a new stock pick for subscribers. If you're not reading the inexpensive and highly valuable BIG GOLD, take advantage of our current offer to get the proper exposure to gold and silver producers, as well as occasional discounts on bullion that you won't see anywhere else.