"I think what you miss is whether owners of "gold" are aware they own physical gold or a derivative of gold (unallocated, futures, etc)."
Why do you think I believe that Paper buyers are not aware that they are not buying physical. Actually that is the difference between the west and the east. The west is comfortable with buying paper. They have been living with paper gold for much longer than a century.
"The thing is this, paper gold (paper hereafter) and physical gold (phyz hereafter) are two different products"
Exactly. And this is the reason why the price can only match when there are sellers providing phyz at the price that is required to keep the demand and supply dynamics of paper. It is the phyz that cannot be printed, so the availability of phyz is of utmost importance for the price match. If the phyz isn't there, the price match will break.
"that are connected in price through the mechanism of 'delivery' for futures and 'allocation' for unallocated accounts"
I don't care about the future price of gold, that is what is predicted by the futures. The current price depends only on the current delivery (or allocation) of physical. No physical, no price. The gold goes in hiding.
You do agree with the demand and supply setting the price of gold. But you think that the paper buyers and sellers follow the price set by the phyz. I have the opposite opinion. Can you tell me exactly how the price is defined by the market? Does it happen that first physical guys put show their demand and availability, and then set the price, and then the rest of the paper guys use that price for their trading. Or is it dynamic. The paper guys do their thing and the physical guys do their thing.
I think what happens is every body is buying and selling and the critical thing for the price is that the price is being set in the west. The east is using that price to buy or sell gold. The east mostly buys the phyz, they don't sell much, at least the selling is consumed locally. They don't deal much with paper. So the phyz buy and supply is not really setting the price. The buyers (east) are just using the price set by the sellers (west). The buyers only buy when the price is low. That means there is some entity that acts as a soak to keep the slack in demand and supply when there is more demand than availability. That is where FOFOA's coat check theory comes in and GLD fits in.
If the price is set in the west and the main phyz buyers are missing from the equation what is setting the price, the obvious answer is paper. Yes there is some buying and selling of physical going on too. But that is not very material to the price mechanism, as the major buyers are missing from the equation.
"The West cannot meet demand? Is there any proof? Did the price explode? COMEX default? LBMA implosion? Supply is there, what else are the Chinese importing?"
Great. Looking for the proof of future in the present. Its like looking for the proof of a market crash in the period of boom :-).
"You mean the price of gold (paper and phyz) can, simply, go up? Without something breaking. What can exactly break? "
If the west cannot supply the gold that the east demands at the price quoted by the west, will there be a disconnect? The GLD has been draining. That is why look at it, to see when will it be closed down. That will be the moment. Of-course you cannot prepare when that happens, it is already too late.
"This makes no sense to me. Why would it hide? Gold is immortal, there is 180,000 tonnes above ground. why would it stop moving?"
So continuing from the previous argument that west sets the price and east buys at that price. What happens if the price is set too low. It can happen if people are selling too much paper, and GLD has run out (yes that is a requirement, that is why we watch it :-)). The demand from the east will outstrip the supply by the west. The East will be willing to pay a lot more, when they find that gold is not available at the given price, because they will know that something has broken.
"Why would a sell cause the price to go down? The size/volume of phyz sold and bought does not mean the price should go up or down. The forces between supply and demand set the price. Volume has nothing to do with it.
If APPL shares are traded a lot, should the price rise or all?
Volume doesn't mean anything. "
You mean to say selling is equal to trading??? If a lot of gold is sold in the open market, there will be a lot more gold available for the buyers. That gold must be absorbed by somebody. It will depend on how slowly the gold is sold. Remember that very few people in the west buy phyz. The phyz would then need to be absorbed by some investors who are willing to allocate that much of money to buying the phyz. The price will drop. Of course it will get absorbed by the GLD nowadays, but at that time it did not exist.
You don't remember the selling of gold by UK, and how it pushed the price of gold down? Or do you think there was another mechanism for that.