Gold’s rollercoaster ride is far from over

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-plus 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 subject 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