More wild price swings will plague the gold market in coming weeks as bulls and bears grapple over direction, investors' faith in the metal starts to wobble above $1,800 an ounce and policymakers take desperate measures to stabilize economies.
Gold investors have been on a rollercoaster ride since the Swiss National Bank shocked markets last week with its decision to peg the franc to the euro and to buy unlimited amounts of foreign currencies to curb its appreciation.
The move sparked the latest round of volatility in gold, which has since traded in a more than $100 range. Seeing the gold price lurch down or up $50 in as many minutes has become a fairly regular feature of the market over the last few weeks.
I think the market will go higher, but a $100+ correction cannot be ruled out, especially if the dollar decides to strengthen even further, said Saxo Bank senior manager Ole Hansen. A pretty strong stomach might be required short-term.
Financial markets around the world have been subjected to extreme price movements as investors grow increasingly unnerved by the ability of euro zone leaders to solve the regional debt crisis that has engulfed Greece, Portugal and Ireland and now threatens Italy and Spain.
Furthermore, many U.S. indicators point to stalling growth at a time the Federal Reserve has a shrinking set of tools at its disposal after having vowed to keep interest rates near zero and buy trillions of dollars' of government bonds.
These problems are not new, and until now have been positive for gold, driving it to record highs above $1,920 an ounce earlier this month. But with prices in such uncharted territory, such extreme uncertainty is unsettling investors.
If you subscribe to our view that there is a bubble going on -- and I don't think that's unreasonable -- you would expect to see substantially higher volatility leading up to the peak in prices, said Natixis analyst Nic Brown.
It is simply the dynamics of the financial markets - they just become inherently more volatile as you rise to what are ultimately unsustainable peaks.
The more than $600 gap between gold price highs and lows this year is the largest since at least the 1960s in absolute terms, though its 32 percent range this year is still below the 42 percent spread seen in 1980, another record-breaking year.
Gold's correlation to the stock market has become more positive, meaning it is more prone to move in tandem with equities than before.
So with equity market volatility, as measured by the VIX index, which reflects the volatility on options on the S&P 500 index, running near its highest since the global financial crisis of 2009, it has been no surprise to see gold succumbing to the same forces of nature.
What is more worrying for investors is the metal's break with its traditional correlations to assets like the dollar, which make its next move even more unpredictable and pushing it closer to what many now say is bubble territory.
The idea that we will be suffering from these pockets of high volatility is probably very likely, said Deutsche Bank commodities analyst Michael Lewis. We have high debt levels... and I think the sense for us is, these liquidity issues in Europe are going to be with us for quite some time, so the system is much more unstable.
These periods of high volatility have been increasing in frequency since the (start of the debt) crisis.
TURBULENCE, BUT NO CRASH
Sharp moves higher or lower in price in any market will thrill short-term traders, but tend to make most investors twitchy about big bets one way or another, thus reinforcing a vicious circle of limited volume and greater price turbulence.
Exchanges such as the Chicago Mercantile Exchange, home to most of the world's trading in gold futures and options, have drastically raised margin requirements, sending the gold price into even greater tailspins as investors rush to cut their more costly holdings.
Despite this, and repeated rounds of profit-taking, there has been no crash in gold prices. While volatility has increased, gold has not seen selling on a scale even close to that of the buying seen early in the third quarter.
The rising cost of owning gold and the greater risk that high volatility brings has not deterred buyers, especially now the Swiss franc has effectively been struck off the list of perceived safe-havens with the SNB's intervention.
For better or worse, gold is still seen as a good bet in a world where currencies, commodities and equities have struggled to find a clear direction. That does not mean, however, that the market will be without its heart-stopping corrections.
Buyers are still emerging on sell-offs, but it looks like the bullish investor has got to be a bit patient right now, said Saxo Bank's Hansen.