NYSE Runs Out of Gold Bars: What Happens Next?

Source:

"There is now so much demand for delivery of the mini-contracts that the exchange can no longer deliver 1 kg bars."

The NYSE-Liffe futures exchange has, it seems, run out of 1 kg bars of gold. Futures markets, like NYSE-Liffe and COMEX, try hard to maintain that they will deliver physical gold, in completion of executed contracts. Indeed, to prevent fraud, U.S. law requires clearing members to keep a stockpile, of one kind or another, consisting of a minimum of 90% of metal. Up until October 2008, it didn't matter. Only about 1% of long buyers of paper gold futures contracts typically took delivery. Now, the situation is very different. Demand has surged and, it appears, one major futures exchange, NYSE-Liffe, and by extension, the COMEX gold warehouses it shares with its larger cousin, are unable to meet the requirements of their contracts, vís a vís, delivery of 1 kg. bars.

As of December 31, 2008, the NYSE-Liffe mini-gold (YG) contract specifications were changed to read, in pertinent part, as follows:
33.2 fine troy ounces (+10%), no Less than 995 fineness. Seller's discretion delivery of one vault receipt representing one bar or one Warehouse Depository Receipt (WDR) representing either 1/3 interest in one full size gold NYSE Liffe vault receipt or full interest in a NYSE Liffe Mini Gold vault receipt. Delivered to exchange approved vaults by exchange approved carriers
But, before that, on August 26, 2008, it read as follows:
33.2 troy ounces (±5%) of refined gold, assaying not less than .995 fineness, contained in no more than one bar.
There is now so much demand for delivery of the mini-contracts that the exchange can no longer deliver 1 kg bars. When the wording was changed, a flurry of complaints resulted. Technically, in my opinion, if you bought a mini futures contract from an NYSE-Liffe clearing member, prior to December 31st, you could bind them to their legal contract with you, and force them to either deliver the 1 kg bar, or pay for you to obtain it on the open spot market. Whether anyone will force compliance, however, is an open question.

With the U.S. and the U.K. now engaged in quantitative easing, and other central banks ready to join, we can reasonably assume that the desire to exchange paper money for gold will get stronger. If the price does not rise significantly, and quickly, it is only a matter of time before the shortages reach the 100 ounce bars, and, then, on to the 400 ounce banker's bars. That is what happened, back in the 1930s, and it is happening again. It is impossible to say whether or not this means a rise to $2,000 or $2,500 per ounce by the end of 2009. But, it does mean that the price will surely rise, and, probably, that it will be fast and furious, at some point in the near future.

Related Articles

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe