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How To Play a Comex Default

by John Rubino on October 15, 2012 · 17 comments

This week’s interview with gold dealer Tom Cloud of National Numismatic Associates comes as precious metals are correcting and rumors are swirling around Comex silver.

Dollar Collapse: Hi Tom. It’s been an interesting couple of days for silver, with a big Comex draw-down being followed by a sizable price drop. If the silver market wasn’t so obviously free and honest, it might be tempting to suspect some kind of manipulation…

Tom Cloud: Late Friday afternoon a big client of JP Morgan requested delivery of 3.6 million ounces, which is 17% of all the registered inventory of silver (assuming it’s all really there). But only 1.6 million ounces were reported moved. A lot of people are asking where the rest of it is. If it wasn’t immediately available and the client allowed JP Morgan to move it in pieces, that’s another sign of very tight supply.

Ordinarily seeing that much silver inventory move would make the price go up, but at the same time they – probably the same people — were buying shorts to drive the market down late in the day when trading was slow.

DC: The size of the silver draw-down raises the question of what happens if a few more big players want to turn their futures contracts into physical metal. Would this cause a delivery disruption or outright default on the Comex?

TC: Somebody stepped up and said ‘no more paper for me; it’s time to get the real thing in my name.’ They’ve played the [paper silver] game and benefited from it and now they want their silver. But not everyone can do that. There is 100 times as much silver paper [in the form of futures contracts] as there is physical, which means a lot more people think they own silver than there is silver in the world. At some point someone will be left out. If 17% of Comex inventory is taken out in one move, then you don’t need that many more big players to take delivery to see this thing fall apart.

A lot of people were already worried about this, and what happened Friday certainly raises the odds that others with paper claims are going to ask for physical. This morning I’m seeing a lot of dealers buying a lot of silver for their own inventories. This is a very scary situation.

DC: Has an exchange ever defaulted on a commodity?

TC: I don’t know of one that has completely defaulted, where they drain their warehouses of product. So it would be a huge event. And the picture for gold, though not as urgent as silver, is also pretty tight, with futures contracts far exceeding available physical.

DC: So what does the prospect of a Comex default mean for precious metals investors? How can we play it?

TC: Only gold bars from major fabricators like ScotiaMocatta and Johnson Matthey can be used to settle a Comex futures contract. That is, they’re approved for future delivery. When the shortage hits, if you’re holding one of these bars the premium is going to shoot straight up, so in addition to a higher spot price you’ll make money on the wider premiums. Because of this, a lot of my larger investors buy Comex bars exclusively instead of coins.

There are now ten different mints producing Comex gold bars. Two years ago there were four. Comex is smart. They know it’s gonna hit the fan and are now willing to approve other brands in order to increase their sources of metal. I don’t think they’d be approving these other brands if they didn’t expect a default. It’s the same with silver. 24 months ago there were two approved fabricators, Johnson Matthey and Engelhard, making bars you could deliver on a futures contract. Today you’ve also got Ohio Precious Metals, Academy, and Royal Canadian mint.

But even in the absence of a Comex default, bars are cheaper than coins. They’re not made by a country, but by large refineries, and because of this their premiums are lower. One exciting thing that happened this year is the introduction of one-ounce Comex silver bars from Johnson Matthey. The premium is $2 an ounce, which is about $0.75 an ounce more than for a 100-ounce bar. But it’s a dollar an ounce cheaper than for a Silver Eagle coin, so they’re selling very well.

DC: How do you store Comex bars once you’ve bought them?

TC: Several ways. You can take delivery of them and arrange your own storage. The newest state-of-the-art depository is Diamond State in New Haven, Delaware. They’re tremendous. A buyer can arrange to have their bars shipped directly there, generally for free. They’ll handle the paperwork and charge an annual storage fee. If you buy through us, we have a warehouse where customers can store their bullion for three years for free. It’s allocated, so you own specific coins or bars, and it’s all insured.


For more information or to place an order, call 800-247-2812 or email Tom Cloud at tgcloud@bellsouth.net. Mention DollarCollapse.com for free shipping and insurance.

  • paper is poverty

    I believe there was a default on nickel on the London exchange, though it seems they successfully managed perceptions by claiming it wasn’t really a default. (E.g. see: http://news.silverseek.com/TedButler/1156198042.php .) Similarly, when they run short of silver the mainstream media will not call it a default, it’ll just be a tweaking of the details of deliveries.

    If Comex is now drawing silver from additional mints then that means less silver is heading for the small retail market. Every now and then the premiums on coins at coin shops get pretty large, and I would think this will make them even larger. Another reason for the little guy (like myself) to accumulate junk silver.

  • John G.

    Thanks for the update, John and Tom! Exciting times!

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  • Tom

    What is behind this near default? I suspect it’s a growing loss of confidence in America’s leadership. It’s not just the national debt and QE. America’s failing foreign policy, in particular the Middle East, is a disaster. Spying on citizens and ammo accumulation by DHS are also creeping people out. And, when you look at the idiots running for president, it’s pretty clear nothing will change for the better. I have only bought physical metals for the last nine years and feel quite comfortable with my stash. Buying gold at $335 will do that. I’m in the process now of buying a standby generator for my house. In other words. I think the system is going down and not just the financial system


    Hi!, Patrons Of Dollar Collapse Et Al:
    How would this method work on a used car lot? More paper than cars? I don’t think so and so we have a fake, undeclared shortage of both gold and silver being traded? That even beats the Fed.’s trading in made out of thin air $’s doesn’t it? Suely, this can not be called economics can it; that is trading in something that physically isn’t actually there for real world trading? Who does this kind of trading in their right minds? It’s time to put the illusionists out of business isn’t it? How can you possibly make a profit or incur a loss on something that doesn’t even exist is way beyound me to comprehend and how about you? At least when I order a Big Boss @ The Boss Hamburger Stand I get my hamburger right? So, you order eiher gold and/or silver @ the Comex but it isn’t available to take delivery? There’s no serial # attached to your purchase? This set-up really makes me completely suspicious regards whether or not the gold OUR government claims to have stored @ Fort Knox, Kenticly is actualy there or is OUR government telling US tall tails like does the Comex?
    RUSS SMITH, CALIFORNIA (One Of OUR Broke States)

    • esqualido

      1. The banks only have $10 in cash/treasuries for every $100 in customers’ accounts, and no one gives it any thought, even though FDIC insurance does not cover all the rest
      2.Regarding any company that promises storage, allocated accounts and insurance, so did MF Global, and it meant nothing when they went bankrupt.
      3. As for precedents for exchange failure (TC said ” I don’t know of one that has completely defaulted”), what about Refco just a few years back?
      4. As for ” the gold OUR government claims to have stored @ Fort Knox, Kentucky”,
      it doesn’t belong to “the government” or “the people”- it belongs to the Fed, which initially challenged Judicial Watch’s FOI demand on the grounds it was NOT subject to governmental disclosure(i.e., a privately owned company). Now you know more than the poor G.I.’s who are guarding it.

      • paper is poverty

        It’s interesting that Jim Rickards, who has worked at high levels in finance and US intelligence, has pointed out that the national gold is virtually all in the military’s possession. You have to wonder what his purpose was in making that point. Is he warning the Fed? Or warning the nation about a military coup? Or telling other nations our gold is untouchable no matter who has paper claims on it? He also says that it doesn’t matter if the gold has been lent or even sold because that’s only a paper transaction and (according to him) the gold is all still in place physically… in the hands of the military.

        What was it someone here said? If it’s not in your hands, you don’t own it.

  • Charles Savoie

    It may be difficult for the moderator to let this post stand; but reconsider before expunging it. All private metals depositories, including those run by those possessed of angelic morality, invite government seizure, because physical concentration creates tempting targets. If you were a statist bureaucrat that’s how you’d see it. I favor absolute dispersion of metals in as many pinpoints on the national map as possible. If the government moves to take gold as in March 1933, its appeal will be to monetary emergency; and if it moves against silver as in August 1934, the appeal will be to national security. The same interests that orchestrated disposal of the former 165MOZ stockpile, mostly to the Silver Users Association, would be back of any proposed seizure, and also claim legal precedent. In any silver grab, none other than the Silver Users Association would be beneficiaries–is that why they met with Homeland Security in October 2007? We must be ready to organize crippling boycotts against every SUA member company please see http://www.nosilvernationalization.org

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  • Chuck Smith

    Store it in a depository or a warehouse??? Man …. how many times does it have to be said … “If it’s not in your hands, you don’t own it”.

    • http://www.facebook.com/people/Brian-Blackburn/1494680920 Brian Blackburn

      Chuck I totally agree with you on this! Good luck to anyone who really thinks they are going to get their hands on their precious metals when sh_t hits the fan. More likely someone with access to the vault will steal everybody’s silver & gold.

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    you can put a floor safe in your house in only 2 to 3 hours. rent a chipping hammer . Pull the carpet back in a closet. chip out a hole in the concrete big enough for the floor safe. put the safe in the hole and fill around it with concrete. I LIKE TO PUT THE SAFE IN A LITTLE BELOW THE SLAB LEVEL SO IT WILL NOT SHOW WHEN I FOLD THE CARPET BACK OVER IT. IT IS SIMPLE ANYONE CAN DO IT. DO NOT TRUST ANYONE WITH YOUR METALS. I SAID ANYONE. ONLY TWO PEOPLE KNOW WHERE I HIDE MINE AND MY WIFE IS NOT ONE OF THEM. THE PLANNED CRASH IS VERY CLOSE SO GET READY.

  • bluesinter

    here in Florida we pay 6% sales tax on silver except for eagles. Makes a world of difference.

  • http://twitter.com/JailBanksters JailBanksters

    So what is stopping these depositories from doing exactly what JPM and BOE do, sell the same Gold/Silver bars 100 times over. Fractional Reserve Storage.

    • WindexPane


      Nothing. Nothing is stopping them from doing what JPM and BOE do with peoples gold deposits as they do with peoples cash deposits. Fractional Reserve Banking is legal in this country. It is legalized Theft and Fraud.

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