Tuesday, December 15, 2015

Why Doesn't The Comex Run Out of Gold?

This is a question I see often asked on various alternative news sites, especially those devoted to covering precious metals. The argument goes like this. At the Comex where gold is traded using futures contracts, how can they hold such little physical gold in relation to the volumes of gold that are traded? What if those who hold long contracts were to ask for actual physical delivery of the gold and the Comex could not make the deliveries? The question is being raised again this month because the inventory of gold at the Comex available for delivery is below the amount of gold the could be demanded by those still holding December gold long positions.

This article by Louis Cammarosano is one of the best I have seen that addresses this ongoing question. In this recent article he gives four reasons why he believes the Comex will not default. It's always possible that some kind of unexpected event could trigger the long awaited default, but absent that event Mr. Cammarosano provides the best explanation I have seen as to why the Comex has not already defaulted and is unlikely to in the future As with all things we cover here, time will tell if he is right or wrong on this going forward. Below are some quotes from his recent article.


"Despite the predictions of many smart analysts of an imminent collapse or default of Comex, it hasn’t happened yet and probably won’t. Comex analysts have noted the seeming unsustainable gold and silver trading on Comex and have long predicted “imminent” collapses or defaults of that exchange."

. . . . .

"Currently, Comex analysts cite blatant anomalies like:
The mere 160,000 ounces of registered gold in the Comex vaults available to deliver and the 260 claims that long contracts have on each ounce of gold should they choose to settle those contracts by taking physical delivery."
. . . . . .
"The amounts of registered gold in the Comex vaults are less than Russia might acquire in a few days of buying for its foreign reserves and there is less registered silver in the Comex vaults than India imports in a month.
None of those “stunning” facts seem to matter as the registered Comex inventories of gold and silver continue to be depleted and trading of gold and silver in huge volumes carries on.
There has been no Comex collapse or default. It hasn’t happened and probably won’t."
My added comments: The bottom line on this question is that so long as there is enough physical gold (or silver) available to meet the demand for those who buy real physical gold or silver, the amount of paper trading that goes on for gold and silver (the leverage of paper gold or silver to actual physical inventory) won't matter in terms of causing the price to go higher. When a true physical shortage of gold or silver happens such that those who really want physical product cannot get it, that price will move up. That can happen at any time due to anything that causes a rapid surge in demand, but so far supply has been sufficient to meet actual physical demand. As we have noted here many times, another major financial crisis would certainly provoke a rapid surge in demand, but absent such a crisis most people will not be thinking in terms of buying physical gold or silver, especially in Western nations. Physical demand in China and India remains strong for both metals.

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