*******NYSE Runs Out of 1 kg Gold Bars*******

Seeking Alpha reports that NYSE runs out of gold bars. (This is huge!)

(emphasis mine) [my comment]

NYSE Runs Out of Gold Bars: What Happens Next?
Seeking Alpha
Fri, 27 Mar 2009 16:35 UTC

In the first Great Depression, the government tried, for several years, between 1929 and 1933, to maintain a fiction that the U.S. dollar was still convertible and as "good as gold", in spite of having irresponsibly printed more dollars than they had gold to back them. Back in the 1920s, just like during the last 22 years, the Federal Reserve had run its printing press overtime, and, as a result, it couldn't deliver. The U.S. Treasury eventually ran out of the gold, in the face of overwhelming public demand, resulting in the infamous gold confiscation order, by President Franklin Roosevelt, in 1933. History may be repeating itself, except that the government no longer makes any pretension to maintaining a gold standard, or any standards at all. Instead, nowadays, the futures exchanges offer to trade gold for a floating number of dollars, and, it appears, they have printed more paper contracts than they can redeem, at least when it comes to 1 kilogram 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 the fiction 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, vis-a-vis, 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.

In summary, 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. Based upon the original wording, NYSE-Liffe and its clearing members are legally obligated to deliver that 1 kg bar per contract, whether they want to or not, and regardless of the internal rules of the exchange. Whether anyone will force compliance, however, is an open question.

Absent legal action, clearing members are now being allowed to hand out little slips of paper, called "warehouse depository receipts" (WDR) [warehouse depository receipts = unallocated gold, an IOU with no physical gold backing]. These are being substituted for "vault receipts" (VR) [vault receipts = Allocated gold, which involving ownership of a specific physical gold bar stored at said vault. It is a reasonably safe form of gold ownership (depends on how much you trust the vault storing your gold).]. The WDRs, in contrast to the VRs, merely promise the customer that he owns a 1/3 interest in a 100 ounce bar [Gold IOUs from insolvent financial institutions who have run out of 1 kg gold bars]. The customer is not allowed to take delivery, unless he can accumulate 3 WDRs, which equals 1 VR. NYSE-Liffe shares its warehouses with COMEX. The warehouse is predominantly stocked with 100 ounce bars. The COMEX ETF also stores 100 ounce bars, and clearing members can withdraw baskets of them in order to meet delivery demands. But, the COMEX ETF doesn't store any 1 kg. bars.

After a customer complaint, I contacted the head of regulatory compliance at NYSE-Liffe, and had a serious chat with him. He seemed like a nice enough fellow, but he wouldn't admit that NYSE-Liffe had run out of 1 kilo bars. He said that the warehouse registrar has complete "discretion" to hand out paper WDRs, representing a 1/3rd interest in a 100 ounce bar, if the "circumstances warrant". But , if the exchange has "complete discretion" to alter contracts as they see fit, what is the purpose of the advertised contract specifications? NYSE-Liffe claims that its clearing members can rely on Exchange Rule 1408. This obscure rule, however, was never communicated to customers. Nevertheless, it is now being relied upon by the exchange, in an attempt to "default" on the contracts without legal consequences. The rule says that clearing members can substitute delivery of a WDR, giving the customer a 1/3rd interest in a 100 ounce bar, instead of a physical 1 kg bar of gold. There is only one problem. In their eagerness to sell contracts, the exchange failed to communicate that to customers and failed to make it a part of the contract specifications
[Not surprising. Clearly communicated the fact that the NYSE has run out of 1 kg bars would have driven gold prices higher, hurting those short the metal]. As a result, clearing members may be saved from claims by one against the other, but they are NOT immune to the just claims of aggrieved customers. The exchange clearly misled the public, intentionally or unintentionally, and allowed clearing members to sell huge numbers of 1 kg contracts, even though they did not have enough 1 kg. bars to fulfill the contracts.

There has been a lot of talk, over the past year, by bearish gold commentators, claiming that the shortage of gold and silver is merely a fluke of the retail market. However, 1 kg. bars of gold are NOT a retail denomination. They are the primary unit used in most commodity futures markets. 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. What's next? Will there be a shortage of 100 ounce bars? No exchange rule can be used to hide from a technical default on delivery of 100 ounce bars. But, vast numbers of 100 ounce bars are stored at the iShares COMEX gold trust (IAU). So, a default in delivery of 100 ounce bars will take a while.
[It won't take that long once investors start getting wind of this impending default]

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
[if delivery percentages are higher than those seen in December 2008 (very likely), then COMEX defaults could begin before the second half of 2009]. What will the futures exchanges do? Hand out little slips of paper entitling contract holders to a Ľ 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? [quite possibly]

The only way that remaining supplies can be rationed is by a rise in price sufficient to deter some of the buying. For some reason
[US financial system stuck horribly short gold], the supply and demand for gold on the futures market is significantly out of synchronization. This implies that those who claim that the price of gold is manipulated are probably correct, because the situation could not happen in a completely free market. But, even if the gold market is manipulated, the manipulators cannot stop this [pending COMEX default] from happening if the demand for delivery continues. In a more practical sense, coupled with the nearly complete removal of all small retail denominations of gold from store shelves around the world, demand is clearly outstripping supply by a considerable measure.

With the U.S. and the U.K. now engaged in quantitative easing (printing new dollars and pounds), 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 these 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. The main difference is that, in the 1930s, the price was fixed by the government, so the conversion of dollars to gold could not be controlled by a rise in price. Now, however, the price of gold can go up until, potentially, it is high enough to discourage more buying by the public. 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, as some have predicted. But, it does mean that the price will surely rise, that the rise is going to be huge, and, probably, that it will be fast and furious, at some point in the near future.



The old contract specifications (from Trade-Gold-Online.com)

Mini Gold Futures

Contract Size

33.2 fine troy ounces

Deliverable Grades

33.2 troy ounces (+-5%) of refined gold, assaying not less than .995 finess, contained in no more than one bar. Variations in the quantity of the delivery unit shall not be in excess of 10% of 33.2 fine troy ounces.

Tick Size

$0.10 per troy ounce, $3.32 per contract

Price Quote

US$ and cents per fine troy ounce

Contract Months

Jan, Feb, Mar, Apr, May, Jun, Jul, Aug, Sep, Oct, Nov, Dec

Last Trading Day

Third to last business day of the maturing delivery month at 13:30 EST

Last Delivery Day

Last business day of the delivery month

Trading Hours

Electronic: 6:16pm to 4:00pm, Sunday to Friday, US Central time

Futures Delivery

Physical gold basis New York or other exchange designated locations


The new contract specifications (from the NYSE)

Mini Gold Futures

Trading Unit

33.2 fine troy ounces

Price Quote

US dollars and cents per ounce

Tick Size

$0.10 per ounce; $3.32 per contract

Contract Months

The current month (for delivery purposes) plus the next 11 calendar months.

Delivery

New York and Delaware Exchange approved vaults. 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 US vault receipt or full interest in a NYSE Liffe US Mini Gold vault receipt. Delivered to exchange approved vaults by exchange approved carriers.

First Notice Day

The business day immediately prior to the first delivery day.

Last Notice Day

The business day immediately prior to the last delivery day.

First Delivery Day

The first business day of the delivery month.

Last Delivery Day

The last business day of the delivery month.


My reaction:
The much anticipate default in COMEX gold futures has begun!

1) The NYSE-Liffe futures exchange has run out of 1 kg bars of gold.

2) Instead of receiving 1 kg gold bars as per futures contracts, clearing members are now being allowed to hand out little slips of paper, called "warehouse depository receipts" (WDR), which gives the holder 1/3rd interest in a 100 ounce bar.

3) Customers are not being allowed to take delivery, unless they can accumulate 3 WDRs. The futures market is effectively substituting the supply of 100 ounce bars for the supply of 1kg bars, which has run out.

4) NYSE-Liffe mini-gold (YG) contract specifications have been altered to hide this default:

Old contract specifications before December 31, 2008:

33.2 troy ounces (±5%) of refined gold, assaying not less than 995 fineness, contained in no more than one bar.

New contract specifications:

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.

5) In their eagerness to sell contracts, the exchange failed to communicate the new December 2008 contract specifications to customers (who are understandably upset they will not be receiving their 1 kg. bars).

6) 1 kg bars of gold are NOT a retail denomination. They are the primary unit used in most commodity futures markets (ie: Tokyo Commodities Exchange).

7) The failure by the NYSE-Liffe to deliver 1 kg bars constitutes a technical default.

8) The retail gold shortage has now reached the wholesale market.

9) If gold prices do not rise significantly and quickly, it is only a matter of time before shortages reach the 100 ounce bars.

10) No exchange rule can be used to hide a default on the delivery of 100 ounce gold bars.

11) The shortage 1 kg bars is proof that the supply and demand for gold on the futures market is significantly out of synchronization, which suggests those who claim that the price of gold is being manipulated are probably correct

12) Even if the gold market is being manipulated, the manipulators cannot stop the pending COMEX default from happening if the demand for delivery continues.

13) With nations around the world engaged in quantitative easing, demand for gold is sure to grow stronger.

14) Gold prices will rise dramatically.

The price will surely rise, that the rise is going to be huge, and, probably, that it will be fast and furious, at some point in the near future.


Conclusion: Now that 100 ounce bars are being used to satisfy demand for delivery for both COMEX and NYSE-Liffe futures contracts, their supply will be disappearing at an accelerated pace. This supply of 100 ounce bars is the last pillar holding up the paper gold markets. When this pillar crumbles, the gold will enter a once in a lifetime bull market as investors panic to get their hands on the actual metal.

For those who are on the sideline, now is the time to buy gold.

For those who own paper gold (futures, unallocated gold, GLD, etc...), now is the time cash in profits and buy real gold.

Make no mistake: the collapse of paper gold has now officially begun. Once the shortage of 1 kg bars spreads up to 100 ounce bars, the fireworks will really start to fly. You must buy physical gold before this happens!

This entry was posted in Currency_Collapse, Gold, News_Developments. Bookmark the permalink.

28 Responses to *******NYSE Runs Out of 1 kg Gold Bars*******

  1. Anonymous says:

    when the comex defaults besides gold skyrocketing will the whole bag of fireworks go off? dollar cllapse treasury sell off etc?

  2. Anonymous said...
    when the comex defaults besides gold skyrocketing will the whole bag of fireworks go off? dollar cllapse treasury sell off etc?

    Yes, the whole bag of fireworks will go off. A default in COMEX gold futures would completely shatter faith in the US financial system, which would lead to a run on treasuries and the dollar.

  3. $$$Dollar$$$ says:

    Do you think it would be wiser to invest in US Gold Buffalo coins or Canadian Gold Maple Leaf coins that are .99999 PURE?

  4. Anonymous says:

    I would be interested in Mr. deCarbonnel take on how this would affect silver. Ted Butler has been arguing quite convincingly for a long time that the shortage in physical silver is even more acute than that for gold. In fact, one can argue that silver is RARER than gold as it has been used in industrial applications and is increasingly on the short side of production, specifically because of artificially depressed prices destroying the demand for production.

  5. Anonymous says:

    One other question: what is your position on investing in the Central Fund of Canada as a way of investing in "physical" gold??

  6. $$$Dollar$$$ said...
    Do you think it would be wiser to invest in US Gold Buffalo coins or Canadian Gold Maple Leaf coins that are .99999 PURE?

    Whichever is cheaper.

    Gold Becoming Money Once Again
    The market for the standard gold one-ounce coin is no longer fragmented. Both the ugliest and the most beautiful gold coins are traded in indirect exchange strictly by the quantity and quality of metal content, completely disregarding the outward appearance of the coin.

  7. Martijn says:

    Why did we not see this news in a rising gold price yesterday? Have people already started to flee paper gold? I don't really buy that...

  8. $$$Dollar$$$ says:

    Karl Denninger thinks this article and its author are crappy.

    http://www.tickerforum.org/cgi-ticker/akcs-www?post=88917

    His assertion is that this guy has been and continues to be wrong. How do you respond? This will be helpful to me in making a decision to invest in gold.

  9. xyz says:

    Hello Eric,

    You are talking about price of gold in dollars. What about price in euros? Do you mean it will be the same rally?

  10. Martijn says:

    @dekss

    If the exchange truly runs out of physical gold that will be a very strong signal and cause it to rally in all currencies.

  11. These bastards manipulate everything and fail on delivery!!
    They create periodic bubbles but when public start to call regulators (1949, 1962, 1980, 1991) and insist on physical delivery, they fail miserably and able to deliver only low grade surrogate stock (1991, 1999, 2003).
    Don't be fooled by the predatory manipulators - buy on drops, hold the stock and always insist on physical delivery!
    Check this out:
    http://www.marketoracle.co.uk/Article787.html
    http://spilpunt.blogspot.com/2006/11/pryse-van-metale.html

  12. xyz says:

    @Martijn,

    Yeah, sounds logical. It was actually stupid question ;)
    Thanks

  13. m says:

    I tried to buy some silver bullion yesterday.... not a single coin shop in Denver has any.... and they can't or don't know when they can get them. 4 shops told me 'no one is selling silver 1oz coins.'

    I had to take krugerrands.

  14. Jeff Burton says:

    Skim through the comments of that article you linked to. You will find a comment from a guy who works at NYSE Liffe US. He claims the article contains "material inaccuracies". I don't know who to believe.

  15. Bowtie says:

    wooohhooo!

  16. Yoshi says:

    m,

    I called Tulving yesterday and they have as many Silver Eagles as a guy would want to buy (www.tulving.com).

    I'm not saying you should buy, just saying this company says they have inventory and I believe they've been around for several years.

  17. Yoshi says:

    m,

    I've never bought from Tulving though. The salesman there said their minimum order is 20 oz. of gold or 500 oz. of silver at a time; too rich for me!

  18. Bowtie says:

    try http://www.apmex.com i have ordered over 5,000 of bullion from them, they are very good.

  19. dashxdr says:

    Regarding Karl Denninger, I've stopped listening to that quack for months now.

    He's a shill for the status quo. He's betting on The System going on, and on, and on, forever, so his fortune won't evaporate.

    Short answer is, KD is living in fantasy land.

    Oh, along with Mike Shedlock as well.

    If you don't own silver or gold, you're really not safe at all.

  20. $$$Dollar$$$ says:

    Is it better to buy bullion coins or are bars sufficient? I can get bars at the lowest price above spot, while coins are more expensive. Also what is everyone's thoughts on platinum?

  21. Anonymous says:

    DASH....that's exactly how i see Denninger!! I kept scratching my head about this guy. Next time I will trust my intuition.

  22. Anonymous says:

    I bought quite some silver coins and I regret it now. The premium is hugh on Maple Leaf and American Eagles (35%). It is much cheaper on silver bars (premium of 18%).

  23. Anonymous says:

    Anybody see the Comex delivery report.
    In the last 2 days a large bank overseas took delivery of 8600 contracts
    thats almost a billion dollars in Gold delivery.
    And today another 2000 contracts added. !!!
    Here is the link to the Comex daily report.
    Thats over a Milion ounces in two days scheduled for delivery.

    http://www.cmegroup.com/trading/energy-metals/files/delivery.pdf

    Hold on to your panties

  24. The previous report shows 30 tons gold delivery by Deutsche Bank, it is more than likely IMF gold this year (news reported it). Deutsche Bank is an agent and not interested in speculations, just fair sale around 920. This report shows that JP Morgan and puppets shorted this gold with Feds toilet paper and want to trap ordinary investors that just want to buy gold for moms and dads.
    Also, JPM and other fed puppets instructed to cap gold prices until G20 circus is over.
    I hope that US turkeys hold on and just buy this 30 tons without public and take physical delivery.
    Then Obama will be pleased too and the gold price will be stable for next couple of weeks.

  25. Hugo says:

    I too stoped listening to KDenninger. He is too arrogant and ignorant at the same time. When you caught him lying he just starts speaking nonsense.

    KD and Mish both invest in the dollar market, and that is probably why they are betting in favor of the dollar, against any logic.

  26. cees says:

    People should put about 20% of their assets in physical gold.
    Not primarely to invest and / or make profits, but as a insurance in case the dollar or euro collapses completely.
    You might need it for your family in order to buy food, transportation, medical expenses or otherwise if the financial system ever fails.
    You are also insuring your house againt fire, while not expecting that it will burn down this year, dont't you ?
    Greetings from the Netherlands, where banks have all but stopped selling physical gold to the public.
    Congratulations with your interesting and very informative site!

  27. Anonymous says:

    Thought I add this to the discussion...

    China's gold reserves jump, making nation No. 5 holder

    http://www.marketwatch.com/news/story/china-gold-reserves-surge-its/story.aspx?guid=%7B7EDBF160-456B-46AD-B68F-3541D15B611D%7D&dist;=msr_3

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