Fears 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.)
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.