Think of the gold market as an inverted pyramid, with a small amount of gold at the bottom, holding up a huge amount of paper gold. The paper market could be 100 times the size of the physical market.

That means there are 100 paper claims upon each ounce of physical gold. Imagine a coat check at a restaurant issuing 100 claims for one actual jacket. Well, there's only one coat so 99 claimants are out of luck.

It's the same in the gold market.

It's the paper market that creates the volatility. Gold itself is remarkably stable. It only appears unstable because its price is quoted in dollars, which fluctuates. When gold goes down, it's really because the dollar is going up. When gold goes up, it's really because the dollar is going down.

Right now we have a strong dollar, compared to other currencies at least. In reality, the dollar is simply the cleanest shirt in the laundry pile.