Even The Wall Street Journal says gold mining shares are undervalued

While the fundamentals of why gold is a safe haven asset is missed by the author, the fact the Wall Street Journal published a bullish article on gold is in itself worth noting.  I won't belabor the misconceptions on gold in this article as the details can be found in numerous other blog entries, but I would like to point out one important falsehood, because it has far-reaching and pragmatic ramifications, and that is one of counterparty risk.

While I agree the GLD ETF has to a large extent replaced investments in gold equities, as investors blindly trust the integrity of the ETFs, I would like to warn readers that in the event of distressed financial markets--or in the event of a default at the LBMA and/or COMEX (i.e., despite gargantuan trading of paper markets, the physical stock of gold and silver could evaporate), holders of GLD could be in for a very nasty surprise.  GLD and SLV are not 100%-backed by gold and silver, respectively, so redemption into physical gold and silver bullion, could prove problematic.  Also, market prices may bifurcate in the event of a default, with "street" prices of physical bullion soaring even as paper prices remain suppressed.  Cash settlement of contracts will rule the day, and longs expecting physical delivery will be sorely disappointed, whether they hold futures contracts or ETF shares.  As far-fetched as that may sound, it has already occurred with nickel in the London Metal Exchange.

You've been warned--again.  In the event of financial crisis, possession is 100% ownership.  Everything else is merely a legal claim against inventory that may have been re-hypothecated, sold, or leased out multiple times.  In other words, good luck on taking possession.

http://www.gata.org/node/11709