The past few months have been pretty rough for gold buyers. Week after week the price has plummeted, most notably on Tuesday when the spot price fell to a 6 year low. At first glance the decline seems relentless, and a vindication to all those investors who thought that the gold bugs were crazy and reckless. However, there’s bit more to this than meets the eye.

You have to recognize first and foremost that what we’re seeing is the decline of the paper gold market. As the price falls, the sale of real gold keep climbing. The US Mint sold a record of 97,000 ounces of gold in November, which is 185% more than they sold in October, and 62% higher than it was last year. Likewise, silver bullion has also been breaking records.

There have been several reasons given for this schizophrenic market trend.  As for why paper gold is falling, some suspect that the Fed will raise interest rates, thus strengthening the dollar. Maybe China’s faltering economy is hindering their population’s rabid gold demand. There’s also the fact that Mario Draghi, the President of the EU’s central bank, has said that he will inflate the Euro. Again, this would also strengthen the dollar, and lower gold prices.

So then why is demand for real gold going up despite falling prices? Some think there is a renewed threat of a recession on the horizon, so there is a heightened fear of financial collapse. Or perhaps it’s simply because the kinds of people who buy physical gold have fundamentally different beliefs and investment strategies from those who buy paper gold. Physical buyers feel much stronger about gold’s long-term prospects, so they will always buy when the price falls.

I have a different theory however, or at least one that is an addition to the theories you just read. First, take a look at what’s going on with the Comex vault, which is one of several vaults that determine the price of paper gold:

One week ago, gold market observers were surprised when in the span of four days, gold held in the JPM Comex vault declined by nearly 50%, starting on November 16 when the 668,498 ounces held in the vault below 1 Chase Manhattan Plaza declined precipitously to just 347,899 ounces, a new all time low.

Furthermore, as of the latest Comex activity update, on Friday the Registered gold held by JPM dropped another 2,802 ounces to a record low and virtually negligible 7,975 ounces, essentially equivalent to zero as shown in the chart below, even as JPM’s eligible gold has also been seeing a substantial decline in recent months.

But while the decline of JPM gold has long been noted, it was the latest drop in total Comex registered gold which has again raised eyebrows, and which contrary to expectations it would be replenished either from external inflows or by conversion from Eligible both of which have not happened, has instead continued to decline. According to the latest data, total Registered gold dropped by another 11% overnight to just 134,877 ounces, just over 4 tonnes and another all time low…

In case you don’t know, eligible gold is that which is held by the vault and owned by refiners, hedge funds, banks etc, but is not available for delivery. Registered assets represent real gold that is ready for delivery to investors. As you can see, the registered gold at Comex has almost completely disappeared. Right now, the ratio of deliverable assets to paper stocks, is at an astonishing 294 to 1.

So why is the price of gold falling, while demand for real gold continues to break records? I think what we’re seeing is a mass exodus from the paper gold market. These investors are finally seeing the writing on the wall. They see that this can’t continue forever, and that the paper they’re holding is essentially worthless.  So they’re selling their faux gold, and using the money to buy bullion. They don’t want to be the last man hold the bag.

At some point, something has got to give. Either real gold will start to trickle back into the system, or the Comex vault will collapse. If that happens, only those who own real gold will come out on top.