When real headwinds blow for the gold price, they'll blow from the East, not from falling gold ETF sales...

So after The Economist and Harper's both tried (and failed) to tar all gold investors with the same "idiot gold-bug" brush, trust our friends at the Financial Times to mistake Western investment funds for the entire global gold market.

The volume of gold held by gold ETFs - those stock-market-traded trusts backed by physical bullion - has dropped 0.7% so far in 2011 says the FT, quoting research from Daniel Major at Royal Bank of Scotland. That drop of 16 tonnes took global ETF holdings to 2,244 tonnes by end-June.

"RBS also highlighted a significant shift in positioning in the gold futures market," the FT goes on, "with a 17% drop in the net long position [of bullish minus bearish bets] held by speculators on the Comex exchange in New York."

As a result, RBS's Major questions the "willingness of western financial investors to keep buying gold," because they "might be approaching saturation point." But even putting the imminent Eurozone default and US debt-ceiling ruckus to one side, however, it's still a big jump to conflate any such loss of Western appetite with "the decade-long rally for the gold market...nearing exhaustion" as the FT then does.

First, US gold futures only set the price at the margin. Three-month prices will of course affect what you and I contract to deal at today, but it's the underlying trend in physical bids and offers that sets the longer-term move.

Second, gold ETFs pretty much peaked in summer 2010, as the neat Investment Weekly from the VM Group shows. Yet the gold price has since gone on to set fresh record highs against all major currencies bar the Swiss Franc and those of the big commodity-producing economies. What's more, those ETFs are a distinctly Western phenomenon, signally failing to take off in the No.1 Indian market and not (as yet) available to world No.2, China. Yet between them, those two accounted for 57% of global gold demand in the first quarter, according to the World Gold Council's latest Gold Demand Trends report. Growing their physical purchases by more than one-eighth from Q1 2010, India and China hiked their share of global demand from 55%.

More notably still (and again according to Gold Demand Trends), global first-quarter demand for gold bars set a new all-time record. Previous WGC reports called this segment "Bar Hoarding", and it referred specifically to Asian investment demand. Added together, gold bar and coin demand hit their 2nd highest quarterly total, meantime. Whereas ETF holdings - overwhelmingly US and West European; yet to take off in Asia - shrank by 55 tonnes.

Now, none of this means the physical gold market doesn't face headwinds. It's just that, when they blow, they'll blow from central banks raising interest rates to defend the value of cash, and they'll have to blow hardest from the East.

"Our guys can get 7% on a 3-month deposit," as the head of one major bullion-bank's trading team told me of his Indian buyers last month. "Why would they buy gold?"

China too has been busy raising interest rates - Kryptonite to the gold price, but only if cash-rates overtake inflation. China's hike on Wednesday, the fifth since October, took deposit interest rates to 3.5%. Official data says inflation is two percentage points higher, and there's cause to think it's much under-stated, says Simon Hunt (of the eponymous Strategic Services), writing at MineWeb and pegging domestic Chinese price inflation nearer 11% per year. Such clear, drastic devaluation of money's purchasing power makes buying gold an obvious and historically proven defense. Indian deposit rates, on the other hand, now stand almost level with official (down to a 6-month low of 8.72% in May; savers can get 8.25% on a 1-year deposit at HDFC, India's second-largest private-sector bank). So, our man with the Mumbai hotline says, bullion imports have flat-lined.

Still, we are bang in the middle of the typical summer doldrums for Indian gold buying. And looking ahead, CLSA's Christopher Wood - speaking to Euromoney's Institutional Investor - reckons that China has "now finished tightening", while India has already "over-tightened" says former Merrill Lynch chief economist Richard Bernstein.

"How do you know when the central bank has tightened too much?" Bernstein asked the Reuters 2011 Investment Outlook Summit last month. "It's when the yield curve inverts [with longer-term bond yields falling below short-term interest rates]. Historically that has been a fantastic indicator," pointing to the very economic bust which credit-cooling rate hikes are aimed at avoiding.

Big picture, it's these numbers - interest rates and inflation, not least in the world's No.1 and 2 heaviest markets - which matter to gold's underlying trajectory. But for all-too many Western analysts and reporters, East is East and West is all.