I was asked a very interesting question: “What would happen if the COMEX were to actually default?” Off the cuff I would say that the very real potential would be that the world would look like a modern day “Mad Max.” But why? Why would a COMEX default be so disruptive? In one word “trust”…or lack of it. If we are correct and only 1 real ounce exists for every 100 paper ounces that have been sold there will first off be many, very pissed off investors who “believed” that they owned gold or silver. Secondly, believe it or not there are many out there (even Congressmen) who mistakenly believe that our money is still gold backed. Why? I don’t know, but you would be amazed at how many people are this far behind the times.
Most importantly, if the COMEX were to default it would cause a mad scramble for physical metal blowing the price multiples through the roof and there would be NO sellers. All of the misdeeds would be seen full view and the realization that there is nothing except wet, soggy and sagging paper as the foundation for everything would occur. It would also call into question the “official” holdings of the government. Citizens would question it, foreigners would question it and more importantly so would our creditors. Interest rates would rise dramatically as some $5.7 trillion of foreign held Treasuries would be sold… OR the money supply would have to rise this much to purchase the bonds to avoid the higher rates. Either way it would be a train wreck.
Another area that would be blown up would be derivatives of all sorts, not to mention the failure of trust that would occur between counter parties. This lack of trust would also spill over (this is already happening) to relationships between central banks. The Germans kindly accepted receiving their gold over 7-8 years’ time. Do you suppose other nations might also ask the NY Fed for their gold? Is the gold really there? I don’t know for sure, but my bet would be that it is not. Chaos would ensue after a COMEX default, not quickly… IMMEDIATELY!