one large contingent are the miners, who should in theory be able to give the gold back. however, the bulk is the so-called carry trade, hedge funds and bullion banks, who borrow gold at ridiculous rates, sell it, and re-invest the proceeds in higher yielding securities. very few CBs allow us to take a look at the state of affairs, but those that do all have between 50 - 95% of their gold lent out.
the circumstance that would lead to default is a sharply rising gold price...already the primary supply/demand deficit amounts to over 1,500 tons annually, and of the 2,500 tons that are produced (set to fall precipitously in coming years) practically nothing can be used for paying back gold loans, since the jewellery demand alone is nearly 3,000 tons per year. so the game is kept alive a) by drawing more and more peripheral CB's into the game (Kuwait, Jordan, Chile, Uruguay, Sri Lanka and Bangladesh were all recently tapped) and b) by constantly rolling over the loans. paying them back is impossible without causing a major market disruption. in case the disruption happens anyway, it's adios gold for the lenders, since the borrowers will claim 'force majeure'. |
