The golden goose lays an egg, just watch out for all the spin

What an incredible week for the gold price and what an incredible example of how much spin holds up some prices.

What an incredible week for the gold price and what an incredible example of how much spin holds up some prices.

The gold price fell 15 per cent in two days and as we write it is down 30 per cent from its top. The gold sector is down 60 per cent, Newcrest - the largest gold stock - is down 62 per cent and almost all gold stocks have fallen 20 to 35 per cent in the past couple of weeks.

So much for the "safe haven" and so much for the "store of value". What a crock.

The long-term inflation-adjusted gold price is around $250-$500 and every time it has bubbled over in the past 100 years it has drifted back there - and here we are at three to six times the long-term average wondering why we're getting burnt.

This week we have heard a lot of macro discussion about gold and where the gold price should go from here, but the mere fact that it can drop 15 per cent in two days tells you that you are basically in a casino.

And what I find quite staggering is that despite a host of seemingly genius insiders drowning us in deep and meaningful explanations for why we should be "investing" in gold while the price was running up, now it's going down no one can explain why it shouldn't.

The lack of arguments for why the price shouldn't have fallen over and the lack of assurance about why it should go up again is scary.

As the glass half-empties, you begin to realise how hard it is to put a floor value under an ounce of gold when it doesn't produce earnings.

In fact, as the price has fallen, it becomes obvious once again that as an investment that yields precisely nothing, gold is at the utterly opposite end of where everybody wants to invest in the current market.

The problem with gold of course is that whereas most commodity price movements are driven by changes in supply and demand expectations, gold production is not terribly volatile at all, growing at 2 per cent a year while consumption is minimal.

In other words, physical supply and demand are, relative to other commodities, pretty much in balance, in which case, unlike the rapid changes in coal, iron ore, oil and metal prices, which can be justified by rapid changes in supply and demand against a backdrop of voracious consumption, there should be nothing rapid about gold or the gold price.

If you consider all the gold ever dug up forms an essentially static 20.4-metre by 20.4-metre by 20.4-metre cube, a cube that doesn't change much in size, then you begin to realise all the price really reflects is what a herd of hot potato passers are prepared to pay today.

Meanwhile the cube just sits there not doing anything, returning nothing, while the herd goes stampeding around and on occasion having a "freak out" as it did this week. It must wonder what all the fuss is about because even it, a large lump of brainless inert metal, knows nothing is really changing at all, except the fear, greed and delusion that controls the price.

So there isn't much value you can add doing fundamental analysis on the gold price and a lot of the highbrow discussion is redundant because making money out of the current gold price collapse is going to be a function of technical rather than fundamental skills, in which case 90 per cent of you can simply ignore it.

For the rest, the attraction is not gold but a temporary spike in the volatility and liquidity of a tradeable instrument which presents an obvious opportunity to achieve large price changes in a short period of time, although the truth is that while the discussion is about gold a committed trader wouldn't care whether they were trading gold, bit coins, cabbages or tulips.

It's all the same whatever the price, just candles on a chart, momentum, indicators and a herd in a mood to be taken advantage of.

But before you decide to wander onto the battlefield armed with little more than the erroneous trading idiom that what goes down must go up, be warned - short-term trading is a high-intensity skill won by people with the tools and experience, it is not a world for an investor relying on the seat of their pants. If you don't have the skills, you're the target.

For a free trial go to marcustoday.com.au. His views do not necessarily reflect those of Patersons.

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