Commodity Online
MUMBAI: Heard about the recent Fed Reserve’s decision to buy back toxic debts worth $300 billion? If you are wondering where is the money coming from to pump in so much dollars into the economy, the answer is the US Fed is just printing it. In fact the printing press of the US treasury is working overtime now.

So, even as the Fed is churning out dollar notes without proper support of gold stock, investors across the globe are now getting jittery.

Because, they have now started wondering whether the gold which they are trading in the Futures market really exists. If you go by the details and the trade volumes, it is just a fiction and the game of a piece of paper called contracts.



Check out the Futures trade where gold is the most sought after commodity now. If people take delivery for the quantity of gold they buy, no exchange traded fund or bank can supply that much gold. So, what will they do. Will they give shares in gold mines to fulfil the contracts!

In fact, exchange traded funs and commodity exchanges may have to do that now if gold demand goes up like this.

The supply and demand for gold is in no way synchornised. Gold demand is so high that nobody can supply that much
Yellow metal. So, gold prices are surging day by day. The production of gold is also not going up substantially. Even though several mining companies have decided to step up production.

Until October, 2008, it didn’t matter. Only about 1% of long buyers of paper gold futures contracts took delivery. Now, the situation is very different. Demand has surged and, it appears, several futures exchanges are unable to meet the requirements of their contracts.

Reason is that they don’t have as many gold bars to supply to the people who seek delivery. The only way that remaining supplies can be rationed is by a rise in price sufficient to deter some of the buying.

According to a report appeared in a website (seekingalpha.com), the NYSE-Liffe futures exchange has, it seems, run out of 1 kg bars of gold.

US law requires clearing members to keep a stockpile, of one kind or another, consisting of a minimum of 90% of metal. Which many exchanges are not able to do now.

Clearing members are now being allowed to hand out little slips of paper, called “warehouse depository receipts” (WDR). These are being substituted for “vault receipts” (VR). The WDRs, in contrast to the VRs, merely promise the customer that he owns a 1/3 interest in a 100 ounce bar. The customer is not allowed to take delivery, unless he can accumulate 3 WDRs, which equals 1 VR.

Unlike the American exchanges, the 1 kg bar dominates deliverable contracts, for example, on the Tokyo Commodities Exchange, as well as many other commodities exchanges around the world. They were also the primary unit of the mini-gold contracts (YG), offered by NYSE-Liffe, prior to the technical default. In other words, the retail gold shortage has spread into the wholesale market.

All that said, however, given that the Fed printing press is running overtime, things are going to get tighter. It will take only a few months of delivery percentages similar to those seen in December, 2008, before all the 100 ounce gold bars are gone. What will the futures exchanges do? Hand out little slips of paper entitling contract holders to a ¼ interests in 400 ounce banker’s bars? There is no rule that allows that. What happens when people start taking mass delivery of the 400 ounce bars? Will they hand out fractional shares in gold mines, along with picks and shovels?
(Inputs: seekingalpha.com)

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook