A few days ago, I suggested that paper gold was ponzi scheme. Banks are selling unallocated gold certificates to customers on a fractional reserve basis. This is what is called a “naked short”. It is naked because the banks don’t have access to the assets to cover their short. Jim Rickards reported an anecdote that would verify this very point in an interview with (hat tip Business Insider’s Gus Lubin): The owner of a ton of physical gold, who had placed it in safe keeping at a Swiss bank, recently asked for delivery, and it took the bank a month to comply with his request, only after requests from lawyers and threats to expose the bank publicly. The story is told at about the half way point on the MP3 that can be heard here. The best explanation for this delay in delivering their client’s gold is that that the bank had shorted it, and it literally took them a month to buy back the ton of gold; but they were supposed to be holding it in their vault for the client.
Needless to say, I’m not investing in banks–even the “safe” Canadian banks like the Bank of Nova Scotia; my last position was closed when I bought back a put option on BNS on 21 Oct–I’ve become convinced that banks are far too complicated for a simple guy like me to own. When they have to cover the gold and silver that they’ve shorted, it will make the sub-prime mortgage crisis seem insignificant by comparison. Yes, they have shorted silver too. This is the conclusion of this video (@ 26:35):
The Righteous Investor 
Unless they are forced to accept fiat “equivalent value” in exchange…
Depends on if the paper says that the bearer has the right to physical gold on demand, I suppose. I’ve never seen a gold certificate–I’ve only traded gold mining stocks to have exposure to the sector. In a time of hyperinflation, however, I doubt that people with paper gold will want fiat money.
In the case of the anecdote, the person was the owner of the physical gold. Apparently it was not allocated certificates but actual gold that the client deposited at the bank. It should not have taken a month to get it from them.
I have no way of knowing if the story is true. Or whether any stories are true about clients demanding physical delivery for gold and not accepting a buy out in its place. That of course is a lot easier for the bank, because it will no affect on the market price. Besides, some banks have the ability to borrow seemingly limitless amounts of fiat money at zero % at their central bank. You are right then that the only way this thing can be exposed is if the customer insists upon delivery.