ABG

Will COMEX Default on Gold and Silver?

The counterparty is the exchange and short seller, not the broker. The broker is merely your agent, carrying out your trades.

There is always some temporary counterparty risk with the clearing broker, because they store your cash during the transaction. Notable is the fact that commodity brokers (and stock brokers who are acting as futures brokers) are not covered under the SIPC insurance scheme.

But no major futures clearing broker ever has gone bankrupt, to the best of my knowledge. It is a very profitable business.

There is no law on this, because the event has never happened, but, theoretically, best execution regulations would require the broker to buy the gold promptly, on the spot market for you, to carry through the trade to its natural conclusion of delivery. The exchange would be under an obligation to reimburse you (and, therefore, the broker) on all costs. The broker should have no problem in taking whatever short term loans it needs to carry through the transactions.

Keep in mind that your short selling counterparty is probably one of the biggest banks in the world, like JP Morgan, HSBC, Goldman Sachs, etc. They are obligated to carry through the transaction, so the likelihood that your broker will actually need to go to the London spot market to buy is VERY small. It will almost assuredly be done by the short sellers to save face.

Remember, these banks all have complete access to the federal trough, and feed at it regularly, so money won't be a problem for them. Contrary to the visions of some metals aficionados, gold is very available, provided that the price paid is high enough. In short, I think the counterparty risk is minimal, especially if you buy a contract for the next available expiration date, and take delivery that month.