Here's a riddle for you...

When folks sell their electronic-traded-fund (ETF) gold and other electronic bullion, where does it go?

Does the bullion zap away into the nether regions of the internet? Does it move from one clandestine warehouse to another? Maybe it heads to a government coffer?

You may be surprised where one gold research firm thinks the 'sold' metal may be heading. Plus, as the layers of the onion fall off, you'll likely be swayed into my line of thinking: now's an important time to get physical in the gold market...

Before we answer our above riddle, let's take a look at some recent, surprising trends in the gold market.

Even though there's been a downturn in the price per ounce, physical demand for gold is gearing up - at an alarming rate.

Here's what is happening, according to a recent report from the World Gold Council:

  • Mints have uniformly reported being swamped with orders.
  • Total number of American Eagle coin sales in the month of April were the highest since June 2010 and represented the highest ever dollar value recorded by the mint.
  • The UK mint reported a tripling of coin sales in April.
  • The Perth mint reported the highest demand levels in five years and that the mint was working through weekends to satisfy demand.
  • Premiums in regional markets have been pushed to exceptional levels
  • In India, consumers have flooded into the market, viewing the lower prices very much as a buying opportunity, with a sudden rise in jewellery sales reported from retailers across the nation.
  • Japanese jewellers reported a surge of buying [...] The top jewellery retailing chains reported up to six-fold increases in volume with buying heavily outweighing selling.
  • Some refiners report that they continue to work at high levels of capacity to meet demand. There is a lack of recycling at these price points and large bars have been imported to meet shortages. This is particularly true for those refineries supplying Eastern markets.
  • Transport capacity has also been strained, as the ability of the global supply chain to deliver gold to meet end user demand is limited and difficult to ramp up in a short period of time.

Ha! You can't miss with that many bullets! Indeed, demand for physical metal is on the rise this year. So no matter what you're seeing on your trading screen or hearing from the market sentiment, it turns out physical buyers like bargains and gold is flying off the shelves!

This follows the larger trend we've seen throughout 2013. While ETFs and other investable gold vehicles are shedding their gold (because of outflows from selling), physical buyers are coming out in droves to buy it.

Whether it's individuals who are bargain hunting, or central banks looking to diversify away from the US dollar, the ounces are getting gobbled up at an alarming rate.

It wouldn't be a stretch to say 2013 is the year of 'physical fever!'

Fact is, we got a taste of this physical fever a few times this year - which gets us closer to answering the riddle up at the top of this issue.

According to the above-noted report from the World Gold Council, 45% of Indian and Chinese consumers have purchased gold in the last six months (as of May2013.) Holy bullion, Batman! That's up from 29% a year prior, and represents nearly one in every two people!

You think half the consumers in the US could say they bought gold in the past six months? No way! Regardless of what's happening in the west, Asian buyers are making moves on bargain gold.

This report jives with the March bow-wave of purchases from mainland China. Over 223 metric tons of the Midas metal was imported to China (via Hong Kong.) Whether that represents stealthy government purchases or individual buying, it's still a huge number.

And remember, we've also seen plenty of physical fever from legitimate government sources.

Take Germany for example. Earlier this year the Germans made a shocking (but not so shocking when you think about it) announcement. As it turns out, the Germans want to keep tabs on their physical gold stash. Who'da thought!?

'Very Very Strange' In The Physical Gold Market...

In January, Germany announced a plan to repatriate 674 metric tons of its gold holdings from vaults in France and the US - 'in case of a currency crisis' they said. Indeed, it seems more and more folks want to have their hands on physical metal.

The Germans keeping close tabs on their $27B treasure (at today's price of $1,250) isn't strange. But here are a few things that are! According to commodity expert Jim Rogers:

'What's astonishing to me is that the Germans didn't have their gold in the first place. And what's even more astonishing is the fact that the Americans said, 'we're not going to let you look at your gold. You cannot come in here and audit it.' And then they said, 'and it's going to take seven years for you to get your gold.' Something is very, very strange here. I don't have a clue what, but if I were Germany, my goodness, how long does it take to move a few tons of gold from New York to Berlin? I assure you, if they need it done, I could do it next week, if they really wanted it done. So something is very strange, here.'

There's a lot to be desired in the transparency of the physical market. As Roger's alludes above you've got to wonder why Germany can't get its gold back in quick order.

We're also seeing a similar trend develop at the world's largest metal repository, the London Metals Exchange.

As Bloomberg reports this week, the wait time for getting several industrial metals has exceeded 100 days in certain locations. Sure, we're talking apples and oranges with industrial and precious metals - but the unifying trend is that physical metal isn't always easy to come by. In some cases the major trading houses fully control who has access to metal along with when/where the metals are distributed.

Tying all the pieces together, even in the face of a market selloff, there's a lot of demand hanging around for physical metal.

In a roundabout way this gets us back to our riddle above.

When folks sell their electronically traded fund (ETF) gold and other electronic bullion, where does it go?

Indeed, it doesn't just disappear into cyber-space, nor does it look to be headed from one secret vault to another. Instead, we're seeing the flow of bullion headed towards two distinct places: savvy central banks are picking up the metal and, more and more, we're seeing the metal flow to buyers in the east.

According to the World Gold Council 'It is quite likely that gold previously held in the ETFs will find its way to Asian consumers taking a long-term view on gold.'

'Long-term' is the key word here. This is an unprecedented wave of long-term, physical metal demand from central banks and individual alike.

This metal move, from weak hands to strong, will help to stabilize prices in the long run. Importantly, it may mark one of the last bargain opportunities we'll see in a while.

The Daily Reckoning Australia