Gold Surges 3% - COMEX Default May Lead To Over $3,500/oz

Gold surged over 3% yesterday due to what appears to be have been significant short covering due to concerns about gold backwardation and the continual haemorrhaging of gold inventories from the COMEX. Gold climbed $39.30 or 3.04% yesterday and closed at $1,333.70/oz. And Silver surged $0.97 or 4.98% and closed at $20.46 on Monday.

Concerns about a default on the COMEX, once the preserve of a few observant market watchers, are becoming more widespread as we appear to be witnessing a run on the highly leveraged bullion banking system.

Support & Resistance Chart - (GoldCore)

Very robust physical demand from the Middle East, Asia and particularly China and a decline in the dollar also helped prices log their biggest one-day gain in over a year and their first close above $1,300 an ounce in nearly five weeks.
Gains in silver futures, meanwhile, outpaced gold’s rise, with silver surging 5%.

Gold may have been higher also due to the weak U.S. dollar which is under pressure from poor U.S. home sales and comments from Bill Gross, PIMCO co-chief investment officer, who said he expected the Fed won't tighten policy before 2016.

Gold has recovered nearly $150 or more than 12% in less than a month since hitting a three-year low of $1,180/oz on June 28th. Gold has made the strong gains due to robust physical demand as seen in the still high premiums in Asia.

Respected investor and precious metals guru, Jim Sinclair has again warned of a risk of a default on the COMEX and said that gold prices will rise to $3,500/oz and that gold at $50,000/oz is “not out of the question.”

Sinclair, the successful gold and silver investor and a former adviser to the Hunt Brothers in their liquidation of silver from 1981 to 1984, said in a posting on his blog that was emailed out to subscribers that:

“The cause of today’s spectacular rise in the gold price is the reality that with Friday continues large drops in the COMEX warehouse gold inventory. No cogent argument can be formed against the reality that because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism.”

Sinclair, said that the COMEX would have to move to cash settlement as they do not have nearly enough gold bullion to make deliveries and warned that owners of futures may be forced to accept payment in the form of the SPDR GLD ETF. This which would make them unsecured creditors of the bullion banks who are the custodians and sub custodians of the SPDR GLD.

He said that this could lead to the GLD ETF being “destroyed” and said that “it is a truism in gold that
which is convertible into gold will in fact be converted over time.”

Sinclair was likely alluding to a form of Gresham’s Law where bad money drives out good and where ‘bad’ or more risky gold investments are driven out by ‘good’ or safer gold ‘investments’ such as physical bullion in your possession or allocated in a vault outside the banking system.

Gold rose yesterday and Sinclair said, “because those knowledgeable know the inevitability of the changing of the COMEX contract.”

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