Show Me The Gold

Normally, gold futures quietly trade on the COMEX without too much fanfare. Even when there is something worth talking about, there is an important point to keep in mind. Just because gold futures are trading hands – bits of electronic data or pieces of paper – doesn’t mean that any actual gold changes hands.

At the end of contract months, almost all futures-traders close out their positions, and many “roll” their position forward. For example, if you bought a February contract for gold (this means that the contract expires in February), you can sell your February contract and simultaneously buy another contract that expires sometime in the future. This has the effect that you don’t actually receive any gold, and you won’t truly “book” profits, and you will maintain your exposure to gold.

Only a tiny fraction of those holding futures contracts actually want physical gold, and it many cases, it is doubtful whether those selling contracts actually have gold anyway. Both sides are simply in the business of betting on the price of gold, in the same way that speculators might make bets throughout the commodity and currency sectors.

A weird thing happened though – that tiny fraction has been growing as more investors have decided that they’d actually like to be in physical possession of the gold instead of pieces of paper that tell them they will own gold in the future. Now, that small group is in the process of swelling into a small tsunami. It has long been theorized that since much more gold is traded than people seem to have, that when investors demand physical delivery the COMEX will become a joke, as participants who have sold gold contracts can’t actually come up with the gold they’ve sold.

But not yet. On March 31st, Deutsche Bank laid the gold on the table for everyone to see, and settled up with the investors demanding to take physical delivery. How much gold? Duetsche Bank transferred 850,000 ounces to investors, which is approximately $750 million in dollar terms.

Now Deutsche Bank is certainly a global player, but it seems fantastically unlikely that they happened to be sitting on the massive sum of 850,000 gold ounces for themselves and/or clients who they represented when they turned over the gold. This begs the question, “Where in the world did they come up with that much gold so quickly?” After all, it isn’t like Citigroup has a vault with hundreds of millions in gold bars somewhere. Banks just don’t behave they way these days, they borrow and lend, not sit on assets.

Well, speculation is rampant, and facts are few. But one individual theorizes that it is far too much of a coincidence that on the very same day, the German European Central Bank privately sold 1.1 million ounces of gold and thinks that this must have been Deutsche Bank calling up their friends at the ECB and asking how much gold they could buy. Central Banks, you see, have significant amounts of gold reserves, but these are usually seen as assets that nations, not banks, could use in emergencies.

Whatever the case, individual investors have put the sellers on notice that they aren’t just playing some game on their computer screens. The sellers better have the actual gold at the end of the day, or things are going to get really ugly really quickly. Not every bank, trading desk, or clearing house has the luxury of making a well-placed phone call and coming up with nearly a billion dollars worth of gold.