Gold Price Forecast: This Should Terrify Goldbugs Everywhere

Gold Price ForecastFears of a banking crisis and U.S. dollar collapse have sent the gold demand soaring, leaving dealers and exchange officials struggling to catch up.

With loose monetary policies set to continue for the foreseeable future, the Federal Reserve and central banks around the world have been slowly losing credibility. The situation has sparked a rush for physical gold and silver, leading to shortages and long delays for delivery.

The situation has sparked a “bank run” of sorts at the Chicago Mercantile Exchange (COMEX), the American center for commodity trading. Most of the gold investors’ ownership isn’t actually physical metal at all. Instead, most of the world’s gold supplies are “paper,” representing a promise to deliver actual gold at a specified time and place at some point in the future. Typically, there are 50 ounces in paper claims through open futures interest for every ounce of deliverable gold in the COMEX vault.

The situation is fine as long as no one actually asks for delivery. However, nervous investors have been requesting their gold in mass in recent weeks. With reserves running empty, there are now over 250 ounces in paper claims for every ounce of deliverable gold at COMEX.

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How much worse can the situation get? In an interview with King World News, billionaire resource investor Eric Sprott highlighted just how tight physical gold inventories are at commodity exchanges around the world. (Source: Billionaire Eric Sprott Warns This Could Turn Into Armageddon For The Gold Shorts, King World News, September 18, 2015.)

There are a lot of interesting things going on here. Of course, not the least of which is this development in the COMEX where the physical inventory available for delivery is all of five tons.

Five tons is such a small amount of money. We’re talking $150 million here. The ratio of paper claims to that five tons is 250 times bigger than the amount of tons available. If 4% of the people who were long futures decided to actually exercise delivery, there would be no gold that is available for delivery as it stands today.

That’s not to say somebody doesn’t fudge some numbers to suggest there really is physical gold for delivery. But the COMEX has bled some 89 tons of gold this year. We’ve seen the same thing happen in other exchanges. So the COMEX is in a very fragile state. Imagine being one of the people who’s short gold. What are you thinking today when there’s all of five tons between you and some kind of Armageddon?

In Sprott’s view, there could be a “jailbreak” in the gold market. If someone decides to take out those five tons of reserves, short sellers would be in a world of trouble. Because they would not be able to honor their commitment to deliver at a specified time and place, there would be a mad rush to secure real physical supplies.

Bottom line; gold investors holding on to real gold or silver have little to worry about. But as Sprott hints at in his interview, those with only paper claims to gold could be in for a rude awakening.

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