In which version of Economic Theory does the demand of a commodity increase, while both the supply and price drop? In classical economic theory this is considered impossible. (See below for answer). That is because classical economic theory is at best incomplete and it does not adequately account for presence of force, fraud and coercion in supposedly "free market" systems. Someone actually made a theory about this a long long time ago which fits perfectly the times we are in. The theory is called "Gresham's Law" and is embraced by those (like myself) who follow the Von Mises or Austrian Economic Philosophy. According to Wikipedia Gresham's Law encompasses the following:
"Gresham's law is an economic principle that states: 'When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.' It is commonly stated as: 'Bad money drives out good'.
This law applies specifically when there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar face values for economic transactions. The artificially overvalued money tends to drive an artificially undervalued money out of circulation and is a consequence of price control."
I have been reading many articles on the big drop in "gold" (aka GLD) and "silver" (aka SLV) prices which are really just the paper representation of the underlying asset. Most of us "gold bugs" and "silver bugs" have been saying for a long time that the paper price has become unhinged from the underlying asset price as the supply of both physical gold and silver plummets which means the central banks are selling massive "naked short" positions (i.e. "IOU's" or promises to deliver physical gold/silver). All indicators suggest that the demand has actually increased exponentially for the underlying physical assets of Gold and Silver which means the price should be sky-rocketing when in fact it is plummeting. This is actually a bad sign which is explained in the following article:
10 Signs The Takedown Of Paper Gold Has Unleashed An Unprecedented Global Run On Physical Gold And Silver
"According to today's data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were reported sold on April 17th alone, bringing the total sales for the month to a whopping 147,000 ounces or more than the previous two months combined with just half of the month gone.....
In the U.S., all of the dealers I talk to are reporting huge demand and brisk buying. Silver in any form is quite hard to come by unless you want to pay premiums of 20%+ per ounce above spot price. Delivery times are 5 to 6 weeks out now – that's an unusual situation. If this recent slam was designed to scare people away from gold, it did not have that desired outcome; in fact, just the opposite."