We came across an interesting article today on zerohedge.com that we thought would be of interest to our readers. Not only does it predict that at some point The Commodity Exchange, Inc. (Comex) will default on a large contract, but what will likely happen to the price of gold, and in particular, gold coins when it does. For those that are unfamiliar with Comex, it’s the leading U.S. exchange for metals futures and options trading. In theory, Comex should have enough physical bullion on hand to settle any gold futures contract. However, based on today’s article from zerohedge.com, demand will eventually outstrip supply, which essentially makes it 100% certain that at some point Comex will default.
While we’re not conspiracy theorists, it’s difficult to argue against the fact that demand is now higher than ever before, while the annual production of gold, including recycled scrap gold, has remained consistent at approximately 3,700 tons per year. Additionally, a number of central banks; primarily from BRIC countries, or emerging markets, are currently net buyers of gold, while demand from developed countries has remained relatively consistent. This has resulted in an estimated increase in annual demand of approximately 2,270 tons over the past 12 years.
While the price of physical gold bullion has always sold at a premium over the price of gold in the futures market, the prediction is that there will be a large decoupling when, and or if Comex defaults on a contract. Assuming this occurs, the demand and price of physical bullion, in the form of gold coins and gold bars, will likely diverge, substantially driving up the price and demand of physical bullion. The extent of the divergence is impossible to predict, but needless to say, gold investors are much more apt to favor physical bullion over the futures market.
If today’s article has convinced you that a default is inevitable, we recommend that you invest in gold coins or bars as a hedge against this possibility. Government issued gold coins or privately minted gold bars from well known and reputable private producers of gold bullion are some of the best gold bullion options to pursue.