The gold market has generally included people in two broad approaches. One group viewed futures-market products, including ETFs, mutual funds, and gold-mining stocks, as the preferred way to invest in gold. They favored the comparatively low-cost access these products provided and often used them for speculation. The other group was commonly described as the hard-money camp. Its members believed gold investing required taking physical possession of bullion. They recognized that owning bullion directly could cost more because of dealer commissions and premiums, yet considered it the only sound method for owning the yellow metal. Many people in this group also believed widely used futures-related investments, including GLD, were not fully supported by bullion. In their view, those products could fail if COMEX received a large physical-delivery demand it could not meet.
At the time this article was published, Zerohedge.com had published two articles that the original article said should cause paper-gold investors to pause and consider whether that scenario was plausible. The first article appeared here, and it suggested there might not be enough physical bullion if many contract holders requested delivery. The article said veteran trader Tres Knippa had stated, “there may not be enough gold to go around if everyone with a futures contract insists on taking delivery of physical bullion.” At publication, the article also reported that some investors, including hedge fund manager Kyle Bass, had been taking physical possession of the gold they bought.
At the time of publication, one reason cited for the then-recent concern over a possible COMEX default was that the COMEX gold leverage ratio had risen to levels the article described as unprecedented. The Zerohedge graph that followed showed the then-current gold leverage ratio above 100%:
The original article said Knippa further stated that a single large gold-futures holder requesting physical bullion delivery would use roughly 81% of COMEX inventory at that time. If two holders made such requests, COMEX might not have enough bullion available to satisfy them, potentially producing a default. According to the article’s scenario, either a full or partial default could send popular futures-related gold investments, including GLD, sharply lower while causing physical gold bullion prices to rise quickly.
Beyond the leverage ratio discussed above, the original article said gold investors should watch the registered holdings at COMEX depositories, including Brink’s, JP Morgan Chase, HSBC, Manfra, and Scottia Mocatta. At the time of publication, COMEX listed then-current gold-stock holdings at the following link. The article characterized the relatively limited registered holdings then in stock at those depositories as especially troubling. It also said registered holdings were declining while physical-delivery demand was increasing. As partial support, it cited an article from Zerohedge, which had reported that JP Morgan Chase experienced its largest one-day withdrawal of 321,500 ounces on January 23rd.
The original article said no one could know whether these developments marked the beginning of a trend or merely an anomaly. It nevertheless argued that, when the COMEX gold leverage ratio stood above 100%, physical holdings at major depositories continued to decline, and reports described substantial withdrawals by gold-futures holders, a COMEX default could not be ruled out. The article explained that such a default would likely disrupt financial markets. In the scenario presented at publication, it could also benefit owners of physical gold bullion by pushing prices higher and increasing demand for physical products, including gold coins, bars, and rounds. The article further suggested this event might alter the rules by requiring paper-gold investments to have full bullion backing and requiring investors closing positions to take physical delivery. It noted that the Shanghai Gold Exchange, described there as the world’s largest exchange for physical gold, operated in that manner.
