Gold delivery default

Right now, the price of gold implied by Comex futures is $928.60 per troy ounce, down $83.8

According to Bloomberg, investors are selling gold to get cash. Are they? On the bullionvault.com (greedy referral included in the URL) internal market, the bid ask spread is huge, but still shows a different picture. In the New York vault, people are selling for $917. Holy crap, why the difference ? Well, it could be that BullionVault only has gold bug users who will hold to their gold no matter what, but consider that gold is being BOUGHT at $892.

The truth is that there are defaults on the future physical delivery, where you are allowed to settle in cash (if you whine)... at the level of the future... which in turns prices the risk of default. This circle brings the value of the future to essentially zero. Fast. Patri Friedman asked recently,

Are there realistic situations where it would be better to stock up on physical gold & silver than on financial futures related to gold & silver.

Here's one.

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Soooo... basically,

Soooo... basically, potential gold buyers fear that gold will become so valuable the guys who sell them "future gold" will rather keep it for themselves than deliver ?

Good thing I bought a few ounces for myself during the last few weeks' monthly-low.

Not really, they sell gold

Not really, they sell gold future for speculation... in the end they don't want to deliver, so they try to sell and sell. Eventually the musical chair game ends and someone ends up with the future, having to deliver. At this point they simply claim they can't find gold (partly true, there are few sellers) and pay the value of the future. It's a defect in the exchange rule. You cannot weasel your way out of an oil contract like that.

No Weaseling

I've traded futures and there is no 'weaseling' involved. It's completely legit to settle in cash. In fact it's the normal thing. Most people do not take delivery.

Oil futures work the same way and can be settled with cash. I could have traded those if I wanted and I don't have any oil wells. They mark to market daily and you have to keep enough cash to settle. They don't ask if you if you have any means to deliver oil.

If you think that by buying a commodities contract you are actually being promised delivery then you are mistaken. You are being promised delivery or cash equivalent at the time the contract expires. The other guy is suppose to have cash on hand at all times but if things move quickly against him he does have time to clear, and that is time you both don't have your money to buy gold, and the gold is most likely rising. Otherwise he wouldn't be in trouble.

Perhaps things work different in your country but that's the way it is here in the US.

Suppose your country is different. How exactly would you settle an oil contract if the other party couldn't get any oil? Of course you are going to settle in cash in any market. If not on the commodity exchange then in the courts.

I think you are confusing

I think you are confusing settlement and margining. Margining happens every day, money is exchanged at the closing price (which is also called settlement to make the matter confusing). At the expiration however, there is delivery, which is generally physical. I don't trade oil futures, but Nymex has both physical and financial futures, the later being settled in cash. You cannot settle a physical oil future in cash. Arguably you can go to courts and use legal tender laws but that is very different from saying "oil futures can be settled in cash".
Without physical settlement, there's no market anymore and no one trades the future.

From the nymex rules

200.14 Delivery
(A) Delivery shall be made F.O.B. at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to TEPPCO, Cushing storage or Equilon Pipeline Company LLC Cushing storage. Delivery shall be made in accordance with all applicable Federal executive orders and all applicable Federal, State and local laws and regulations.

Gold demonitized but still a store of value

There are different components to the value of money (as opposed to currency). When gold was money one component of gold value is due to it's ability to be stored cheaply without degrading. The other was that it was useful as a medium of exchange. Gold however has been demonitized by law. It still retains some value as a medium of exchange but the transaction costs have gone way up.

It's quite possible that the one component of the value of gold is going up relative to cash while the other is going down. Gold, as restricted by law, is no longer an easy medium of exchange. Dollars are, also due to law, the official medium of exchange, and right now it is apparent that many people are need of this medium of exchange, to meet payments.

At the same time, since it is quite apparent that long term the value of the dollar is going to go down. This makes gold more valuable long term than gold.

So it is no surprise that people who are planning to hold long term are valuing gold higher than other people who were speculating on Comex, and probably are loosing on other speculations that they have to pay off now, with dollars.

Furthermore, the one value gold has, as a store of value, is not available on the Comex exchange. Whether they whine or not the shorts have the right to give you cash instead of gold for your contract. When this happens en mass the rise in gold prices will happen so fast that the five to ten days it takes to settle will mean you have lost out significant amount of the expected rise over the life of the contract.

The Comex rules are actually just another mechanism by which the government has instituted laws that undermine the true value of gold. It's not an accident.

Consider a gold ETF

One can purchase something like GLD http://www.spdrgoldshares.com/ and own shares in a trust that physically holds gold. They receive gold to create shares, and deliver gold to destroy shares and to raise cash to pay expenses. The shares trade on an exchange, so they are relatively liquid, and it is a fairly efficient mechanism to hold gold, for those of us without a vault. :)

Gold has become a commodity

The "gold bugs" want to return to a metallic based system. The US holds about one oz per capita. If we were to go gold the price would have to be at least $4,000/oz. How would this happen? First, the government would confiscate all private gold . . . like last time the price was inflated.

Further, when the world was on a gold standard the working class didn't own any gold.