Pulling the Plug: Taking Delivery of Gold
In 2011, the University of Texas investment committee took delivery of what was then just under $1 billion worth of gold. It had held the gold in the form of gold futures contracts. Kyle Bass persuaded the committee to take delivery.
This video is worth viewing. Bass explains why he recommended this decision.
The statement that only 1% of futures contract holders ("longs") ever ask for delivery is significant.
Most people trade futures to make fiat money. They do not trade as hedgers who plan to take delivery. They are speculators. They want leverage. Futures give them this.
It is clear that if 4% (20% of 20%) ever want delivery, they will not be able to get it -- not at the agreed-upon futures price.
The rules will be changed, as they were when Bunker Hunt threatened to take delivery in 1979. That change bankrupted him.
At some point, speculators will see that they can make a lot more money by taking delivery. The ones who ask early will get delivery. Those who wait to the last minute will not get delivery. They will get fiat money instead.
In a time of mass inflation, this will happen. That is when speculators will want physical gold. They will move from being speculators to being hedgers. That will mark the great crisis for the Federal Reserve. It will warn the FED that hyperinflation beckons. The FED will have to decide: hyperinflation or tapering (recession).
The Austrian theory of the business cycle teaches that the choice between recession or price inflation is inescapable, once a central bank adopts monetary inflation as a way to stimulate the economy. By artificially lowering short-term interest rates, the central bank sends erroneous signals to market participants. These participants allocate capital on the assumption that consumers have begun to save more and consume less. But this shift from consumption to thrift has not taken place. Falling rates are the product of the banking system's newly created fiat money.
When the central bank ceases to inflate the monetary base, or even reduces the rate of growth, it creates the next recession. In the recession, capitalists re-allocate their capital in terms o the new conditions. The central bank's stimulus is reduced or removed entirely. The stimulus goes away. This is what happened to Bernanke in 2008.
But if the central bank refuses to taper and then cease inflating, mass inflation (under 25% price inflation) moves to hyperinflation. That is destructive of the economy. At some point, the central bank must reverse this policy, or else the public will switch to a new currency. Then the central bank can no longer influence the real economy.
I explain all this in Chapter 4 of my book, Mises on Money. Download it for free here.
If as few as 4% of gold futures holders (longs) decide to take delivery, the commodity future exchanges will not be able to deliver gold. The cash price -- the delivery price -- will skyrocket.
At this point, the public will be alerted to the fact that the new conditions of mass inflation are favorable to gold. The price will soar even more, as new investors stream into this narrow market.
That will send a signal to investors in general: the central bank is losing control over the economy. That will be the day of decision for the central bankers. They want to delay this day of decision.