Reasons why Gold market will break
There are a few things that you have to understand first
1) Price is set by west
2) Most physical is bought in the east, at prices set by west. ie physical buying depends largely on the east.
The following flows logically from the first two truths.
3) So Physical flow depends on the Price, rather than Price depending on Physical Flow.
If you have trouble understanding the above logic, it is going to be tough understanding the rest. Because it depends on 3).
There is another rule, that we must agree on.
A) Paper flow is separate from Physical flow. ie paper can and is normally bought and sold separately from Physical. ie Paper flow has nothing to do with Physical flow.
Now there are several consequences
To keep the paper market relevant, the bullion banks must manage the flow of gold, so that if the demand from East is too low at the set price they must hold it, and if the demand is too high they must provide it. This means there is a need to buffer the gold during the slack in flow. This is where GLD comes in.
I don't mean to say that GLD is the complete buffer, but that it is the visible part of the buffer. If GLD closes down, the paper market will become vulnerable to breaking.
Anytime the demand from east goes so high, that the bullion banks cannot supply the required gold, the price of gold must rise to meet that demand. But we already know that the paper gold sells in a different plane A). So it will put a strain in the paper market, as the paper will be required to sell at a higher price than what the paper market is able to bear. This will force the ETFs and other sponsors to buy the paper at the higher price, to keep their paper relevant. If this situation continues for too long, the ETFs will close down and/or go bankrupt.
Once that situation happens the paper gold market will be broken.
Now we have to think of why the demand from East will get too high. There can be several reasons.
1) The mine production goes too low. This is happening, as prices are too low for spending to find new mines. Eventually the current mines will get exhausted.
2) The price goes too low. The east buys based on the price. The lower it is the more volume they will buy.
3) Trust in paper evaporates. This could be triggered by trust in other paper instruments. This could be a global phenomenon in the coming crisis.
This is why freegolders watch GLD 1) and become happy when the price of gold drops 2). But that might be mute, as the coming crisis could trigger a loss in trust in paper instruments 3).