Dear Prof. Lewis,

The following is a question that's been puzzling me for a couple of months,, and I thought that you might have a productive perspective on it.

At issue is the disconnect between physical and paper gold, and what appears to be a looming, potentially disruptive, short squeeze as the December futures near settlement date. For the past couple of months, it's been getting increasingly difficult to acquire physical gold, particularly coins; when you can get them, you have to pay an increasingly steep premium to spot.

So why not simply buy the futures and take delivery? You avoid both the premium and commissions. Great deal. But man! Do you ever have counter party risk.

As of today, COMEX has open interest on about 18 million ounces of December gold. I'm assuming some proportion comes from hedging by producers, and producers can deliver if a futures buyer takes delivery. But some percentage involves naked shorts, and as I understand it, at some point COMEX is on the hook if a counterparty fails to deliver. Comex has about 5 million ounces in the warehouse and a couple of million more they can lay their hands on (backstopping not just December, but all gold futures).

Anecdotally, I'm hearing that a number of players are deciding to take delivery, and we're also seeing December open interest drop smartly as (I assume) shorts buy in contracts.

I'm not a gold expert, by any means, but it looks like the mother of all short squeezes is brewing, a la the Hunt Brothers and silver 2 decades ago, and that it could put huge upward pressure on gold and also threaten to blow up COMEX.

What do you think?

What's weird is that the precipitating factor is this mysterious scarcity of physical gold even though spot prices are laboring. There's more, a lot more, but you get the idea.

All the best,
Minyan Gene


Dear Minyan Gene,

There's quite a bit of talk about this, actually - and it could happen. First notice day for the December contract is November 28th. If somebody is going to take delivery, that's when we'll know about it - and when a squeeze could potentially begin.