The process to buy gold in the future will change. When you go to a gold shop these days you can buy your gold and its price tag will reflect the price you see on the stock market. But the price of gold could change in the coming years. There will be something fundamentally different about this transaction in the future.

To better understand what is going on, we have to take a look at the paper gold market and the physical gold market. The demand for physical gold is on the rise but the value of these paper gold assets just keep falling month after month.

On the surface it looks like the law of supply and demand has broken, when in reality, it’s working just fine. It makes sense once you realize that the relationship between these paper and physical assets is what’s really broken.

The price of gold will never be the same

2015 will be a new record in the sales of Silver Eagles, yet the silver price is at the lowest level in 5 years. Demand for physical gold in the United States doubled last quarter and increased by 33% globally. Yet the gold price is near the lowest level of the year.

The natural dynamic is for prices to move higher, but the market has been completely overwhelmed by a huge increase in leverage. Just one ounce of registered gold now backs nearly 300 ounces in COMEX contracts. Stated another way, that’s a very small coverage of just 0.0033.

About 1% of contract holders have stood for delivery in recent years. So we could see requests to deliver 3 times more gold than is now in the registered category in Exchange vaults.

Comex lost 50% of its eligible and registered gold over the past 5 years. LMBA in London lost 67% since 2011. Big bullion banks like J.P. Morgan Chase and Scotia Mocatta lost 59% the last few months.

Once those vaults are empty, your trip to the gold shop will be very different. When you buy an ounce of gold and the price of gold is at $1.000, the shop manager will ask you to pay $2.000. Why? Because physical gold will be scarce.