Using Stock Market Volatility to Help You Buy Gold

It may come as a surprise to some that both the S&P 500 and the Russell 2000 are both considerably more volatile than gold bullion.

We believe that each asset class has its own DNA when it comes to volatility. You can see this in the chart above, which shows the rolling 12-month volatility over the past 10 years for gold and gold equities compared to key large-cap and small-cap stock indexes.

For gold, the volatility over any 12 months for the past decade is plus or minus 14.8% and for gold stocks (as measured by the HUI), it about three times greater — investors should look at these numbers as ‘normal’ behavior.

If you don’t pay attention to volatility of gold, for instance, you’ll risk being herded into buying at the top and then getting upset and selling at a loss after it corrects.

When you understand volatility, it’s easy to see how much risk you have if you’re leveraged. If you’re not leveraged, you have the flexibility to be able to buy gold on down days. Volatility can help you buy gold on sale.

Frank Holmes
for The Daily Reckoning