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The Other Run on Physical Gold
By Patrick A. Heller
May 28, 2013

The world’s largest gold trading market is conducted in Great Britain under the auspices of the London Bullion Market Association (LBMA). Its volume of trades is many times that of the New York COMEX.

In theory, contracts traded in the London market are deliverable in physical product. However, precious metals analyst Jeffrey Christian of CPM Group testified at a Commodity Futures Trading Commission (CFTC) hearing on March 25, 2010, that there are more than 100 ounces of LBMA contracts extant for each ounce of gold in London vaults to cover those contracts.

In other words, the world’s largest gold trading market operates to some degree as a Ponzi scheme, where there isn’t enough metal to fulfill outstanding contracts. Christian did not consider this to be a problem in his further comments at the CFTC hearings because he acknowledged that this scheme had been practiced for many years and that the LBMA did allow contracts to be fulfilled by cash payment.

Over the past two months there have been growing problems with delivering customers their physical gold. Near the end of March, the large Dutch Bank ABN Amro notified customers who had precious metals stored at the bank that they would not be able to withdraw those assets after April 1. Instead, the only action they could take would be to sell their holdings to receive payment in cash. Then several Swiss banks started to come up with a variety of excuses why customers could not withdraw their gold either at all or only up to a limited quantity.

Ten days ago, the Hong Kong Mercantile Exchange defaulted on delivering physical gold and silver to fulfill contracts, announcing that it would only make settlement for cash, which amounts may not necessarily compensate contract holders for the current value of their “paper” assets.

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It has already been documented that since the end of 2001 the London P.M. fix has almost always either been lower than the same day’s A.M. fix or at most no more than $5 higher. Overall, since gold closed at $279 on Dec. 31, 2001, the price of gold is almost 400 percent higher. Analyst Adrian Douglas (who also testified at the CFTC hearings on March 25, 2010) calculated the probability that the price of gold would regularly experience a random net decrease between the same day’s A.M. and P.M. fixes over this time frame yet have such a huge gain during the rest of the hours of the week. In his computation, he said the chances of this being a random occurrence were so remote that a more likely event would be that the sun would not come up tomorrow.

Keeping this in mind, the activity in London last Wednesday was extraordinary. The A.M. fix was $1,385.25. The P.M. fix jumped to $1,408.50, a highly unusual rise of $23.25 (1.7 percent). Apparently, one firm was so desperate to acquire some quick physical metal that they were willing to pay significantly above market price to obtain it.

Even more shocking were the terms of delivery. Standard LBMA settlement terms are that the physical metal be delivered two days after confirmation of the contract, referred to as T+2. Last Wednesday, virtually all contracts were stated for delivery five business days after confirmation, or T+5.

The two-day delay in delivering metal that is supposed to be in vaults available on an immediate basis was to allow the purchaser time to make payment in good funds. There should be no need for any further delay – if the physical gold really was available for delivery as required by LBMA terms.

That many London gold deliveries are now being delayed another three days should be treated as a major alarm, especially when you factor in the other gold delivery problems over the past two months. Any outright defaults in delivery in London would quickly affect the COMEX, which also has insufficient gold in its vaults to cover open contracts.

Of 28 institutions that publicly report the amount of gold they hold in their vaults (including the COMEX and the TOCOM in Tokyo), physical inventories have declined 17.5 percent since the end of 2012. With declining inventories and delivery delays and prohibitions at banks and exchanges, it is possible that a global run on physical gold has already begun.

Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at Other commentaries are available at Coin Week ( and He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly.” His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at

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