Imagine you have a chocolate bar...

You can touch it, hold it, and even take a bite from it. That chocolate bar is like real gold that you can physically see and hold in your hand.

Now, instead of a real chocolate bar, imagine there's a picture or a certificate that says you own a piece of that chocolate bar. This piece of paper represents chocolate that you don't actually have - physically - in your possession.

In the same way, the paper gold market is a system where people can buy and sell gold without actually owning the physical gold.

It works like this:

Instead of buying real gold bars or coins, you can buy pieces of paper or digital certificates that represent a certain amount of gold.

These pieces of paper or certificates are like promises that say, "Hey, you own this amount of gold, even though you can't touch or hold it."

And they are traded on financial markets, just like stocks or bonds.

The idea behind the paper gold market is to make it easier for people to invest in gold without the hassle of storing or securing physical gold.

It allows investors to buy and sell gold quickly and easily using electronic systems.

But, it's important to remember that the paper gold market is based on trust, and the value of the gold is tied to the actual physical gold held by trusted custodians.

Since mid-2022 and at the time of this writing, gold is up over 19%, and year to date, gold is up 8% and currently trading just under $2,000 per ounce - with gold futures recently spiking to new all-time highs.

Things look positive for the yellow metal...

Yet, M&A activity for the developers and producers has been quiet and the financing deal flow of quality assets is low.

You would think that with nearly $2,000 gold, this would be the time all the deals at lofty valuations would be getting done, but that’s not the case.

It bodes the question…

Who’s Right: The Gold Bugs or the Generalists?

We can take a deep dive into generalist market sentiment to uncover clues about the situation at play.

Currently, Exchange Traded Funds (ETFs) which provide exposure to bullion, hold over 93 million ounces of gold.

This is what I call the “paper gold” market because you can buy an ETF which will provide the same exposure to gold price movement, without the requirement to store it.

However, there is an interesting pattern here of “higher highs in gold” and lower highs in fund flow from the paper market.

Gold hit $2,063 per ounce back in late 2020, and fund flow peaked above $35 billion.

Then in 2022, as gold again went above $2,000 per ounce, fund flows peaked at $30 billion.

Now here we are again at $2,000 gold and fund flow is at a paltry $15 billion, essentially unchanged since gold prices were at $1650.

So, if paper gold buyers aren’t buying, then who is?