I hear this version a lot, and I don't really believe it. If COMEX needs to switch to paper settlement, people will be confronted with a very explicit reminder that gold and silver are not the same as pieces of paper with GLD and SLV written on them. I would expect the physical market to diverge wildly from the paper market at that point. In fact, if this scenario plays out, it will be the severing of the link between the two markets that sets it all off.
Divergence of the paper and physical markets is likely closer than most expect, and many will be caught completely unaware.
Following COMEX numbers daily, I strongly suspect that paper settlement has been occurring for some time and even increasing of late. There are frequent disparities between the delivery notices (physical metal to be delivered from a bullion bank to a client), open interest (number of contracts outstanding and awaiting delivery) and actual metal reported as being delivered. Even after accounting for loans and swaps, there is a gap. The most plausible conclusion is that contracts are being settled for cash instead of physical; cash settlements are technically illegal when delivery has been requested.
From looking into information from the CME group, it appears that JP Morgan has little to no gold, silver or platinum. Other major bullion banks still have reasonable reserves, but the number of contracts standing for delivery has been putting critical pressure on warehouse stocks of the metals. Normally, delivery is made within the first few days of the month. For the past several months, delivery has been intermittent and run down to the wire, taking all month and what appear to be many cash settlements.
In addition, COMEX warehouse stores of gold, silver, platinum and palladium are dangerously low. It wouldn't take many contracts to overwhelm capacity and pull all of the metal out. During the knockdown in May, GLD and SLV were bought at the bottom in mass quantity as investors were panic selling. I think it very likely that JP Morgan acquired many shares. Since then, there has been significant activity with large quantity of metal being moved out of both ETFs. That would act as a supply of physical for JP Morgan to cover its sizable short obligations and prevent a default of both the banks and the exchanges while keeping it under their control.
Even with ETF metal, the global demand for physical may overwhelm JP Morgan, et al. This could be the reasoning behind the continual delays in delivery, persistent cash settlement and suppression of prices. If the paper short is all that's left and no longer linked to physical, the paper price could be slammed to zero while physical becomes nearly unobtainable.
This is mostly inferred from activities going on behind the scenes, but seems to be the most plausible explanation so far. It is a game of musical chairs and having gold means you get a seat. Without gold, you're out.
While I do think it could be eventually, Bitcoin is not yet mature enough to alleviate that situation and won't be for some time yet.
most of the ppl IMO that own GLD or SLV are just investors who want to ride the wave. they want a fast exit when it pops. if the stock, commodity market declines force a risk off margin call which drives the USD up, the gold price will drop and the last thing those GLD, SLV investors will want is to switch into physical bullion. they'll want their USD's back ASAP. as i suspect as well, GS and JPM have probably bought into these vehicles as well driving the parabolic move only to sell out quickly at the top along with establishing short positions.
There is only so much margin liquidation that can occur. As the market trends toward 100% collateral, raising margin requirements will no longer be an option for suppression. Nor will there be anywhere near as much panic selling. Physical gold will eventually be available only to institutional trading and very wealthy private investors as the price rises.
Do not discount fund management (hedge, money market, etc) as a prime source of GLD/SLV investment. The ETFs are attractive to institutional investors because of their liquidity. It is unlikely that most people realize what those ETFs are, let alone trade them.
Those looking to "ride the wave" in paper without holding physical do not seem to understand money or the importance of physical bullion. They also tend to sell at the worst possible times due to reliance upon conventional wisdom.
I agree with your take on JPM and other banks profiting from the volatility in precious metals. They will be among the greatest beneficiaries.
