If you read the fine print of the GLD or SLV fund prospectus, they fund manager is allowed to lend the fund holdings to short sellers. In effect, the GLD and SLV fund manager is secretly practicing fractional reserve banking.
In this post, I only specifically mention GLD and SLV, because they're the largest gold and silver funds. Even funds that claim to have "full reserves" are suspect (like PHYS). Unless you inspect the vault, you can't be sure that the fund manager has all the metal he claims to have.
GLD and SLV are a variation of the classic fractional reserve banking scam. Shares of GLD and SLV represent a "demand deposit" for gold or silver. At any time, the shareholder may sell his shares for the NAV. However, only "designated market makers" may redeem shares of GLD or SLV for physical metal or futures. The fund manager doesn't keep as much gold/silver in his vault as there are shares of GLD/SLV. In other words, he's practicing fractional reserve banking.
As long as all shareholders don't simultaneuosly sell, the fractional reserve scam continues. Like any Ponzi scam, a continuous supply of buyers helps prolong it. As long as more people buy GLD and SLV than sell, a default cannot occur. The GLD/SLV fund manager is counting on the fact that all shareholders won't simultaneously sell, just like a classic fractional reserve bank counts on the fact that all demand deposits aren't simultaneously withdrawn.
Given that GLD and SLV are practicing fractional reserve banking, an eventual default is guaranteed. It's not a question of if, but when, the default will occur.
Imagine the following headline:
There was a default in the gold leasing market. The GLD fund was stuck with a loss of 10%. According to the fund's prospectus, that 10% loss is passed on to shareholders.What would happen? After that default, people would sell their GLD and buy physical metal. That would lead to a run on *ALL* PM funds, and not just the one that defaulted. After a default, it'd be obvious to any fool that GLD and SLV are a scam.
State insiders are eager to avoid this. They want to preserve the illusion that State paper investments are sound. Therefore, GLD would probably get a bailout, either explicitly or indirectly.
GLD and SLV shareholders do not have the right to redeem for physical metal. They only have the right to redeem for paper. If necessary, insiders will print enough paper to bail out the fund. That would be more attractive than a default, which would cause people to switch from paper to physical metal, taking actual delivery.
GLD and SLV are secretly practicing fractional reserve banking. They are lending out their metal to short sellers. This guarantees an eventual default. However, a default would cause people to switch from paper metal to actual metal. Therefore, the fund would be bailed out, explicitly or secretly. After all, fund shareholders are merely promised paper, and not actual metal. Therefore, a default by GLD or SLV or another large PM fund is logically equivalent to the complete collapse of the State financial system.
An eventual default is guaranteed. That applies to GLD and SLV and all PM funds. However, that default will occur around the same time that the State financial system scam completely collapses. Until then, those funds are "too big to fail" and will get a bailout.