Comex Registered Gold Drops to All Time Low
According to an article in ZeroHedge, total registered Gold at the Comex has dropped to 134,877 ounces, which is just over 4 tones and another all time low. The article reports that the ratio of Gold claims to registered Gold has hit an all time high of 294 ounces of paper for every ounce of physical. (Source: ZeroHedge November 30th)
The stunning part of this statistic is that over the several months the ratio of leveraged Gold to registered Gold has climbed from about 111 to 294! What this means is that if one person takes delivery of their Gold then 293 other people will not have the ability to access all of their Gold.
Traders buy and sell paper Gold contracts to speculate on the price of Gold without having to own the metal. The vast majority of these contracts are settled in cash.
The Comex Warehouse
Comex is an exchange that allows it’s clients to store Gold and Silver in secure warehouses. The benefit of using Comex is that banks and their clients can store large amounts of physical Gold and Silver in warehouse’s which can then be used to settle futures contracts and can be moved from one client to another.
The Comex warehouse solution is typically used for those institutions or investors who have a large amount of physical Gold that needs to be securely stored. Comex is a good solution for large buyers of physical Gold because of low storage fees. In addition Gold can also be easily transferred from one party to another.
Registered vs. Eligible Gold
The eligible category means that the Gold is being stored for a private party and is therefore not available for delivery in the settlement of contracts. This is unless the private party agrees to allow their bullion to be sold for use to settle futures contracts.
Also, eligible Gold held at the Comex must conform to certain standards such as purity and bar size and must be stamped by an approved refiner. The registered category refers to Gold that is available for delivery to settle futures contracts.
So you san see from the above data from the ZeroHedge article that in the registered category there is very little Gold available for delivery to support the large amounts of paper contracts that have claims on that Gold.
If we look again at the eligible category we see that inventories also appear to be declining. In the same ZeroHedge article, it is being reported that Gold held by JP Morgan in the Comex vault has declined by nearly 50% since November 16th.
The decline has gone from 668,498 ounces held in the vault to 347,899 ounces, which is also a new all time low. This has all happened in a matter of weeks.
Comex and the London Bullion Market Association (LBMA)
As regular readers know the Shanghai Gold Exchange (SGE) is the only major official Gold trading market in the world. All trades on the SGE are settled with the exchange of physical Gold bullion. Paper contracts do not trade on the SGE.
Comex is a paper Gold exchange where the percentage of Gold backing the paper trade is very small. This can be seen by the numbers presented above. The LBMA is similar to the Comex, however the LBMA has a higher amount of physical Gold exchanged. The leverage used on the LBMA between available Gold vs. paper traded Gold is also very high.
According to an article on safehaven.com, The LBMA indicates in it owns market guide that its primary gold trading contracts, unallocated spot market contracts which are claims for spot physical gold, give the holder just an unsecured claim for physical gold. So these are in essence paper Gold trades that give the holder the ability to take delivery and own the metal.
However, the article reports that the London spot physical gold market trades 200% of the global annual mine production of Gold each day. So, in other words a very high percentage of the trades will not have any claim on physical Gold. The paper contract volume greatly exceeds the amount of Gold that is available for delivery. (Source: safehaven.com 2015 November 21st)
Both the LBMA and the Comex operate with very low inventories of physical Gold compared to trading paper trading volumes.
Movement of Gold from West to East
One of the key questions to ask is why are the Gold inventory stocks in London and on the Comex declining so rapidly and where is the metal going? One of the factors that is playing into the diminishing Comex and LBMA Gold inventories is likely the incredible demand from countries in the East such as China, Russia and India.
As we have written in the past, export data from countries such as the UK, Switzerland, Hong Kong and Australia show that China may be importing significantly more Gold than what is being reported as official holdings.
The data suggests that Gold movements have been flowing from West to East landing in the hands of China. It appears that Westerns do not value the physical metal as much as the East does. However, if there is a default on the Comex many traders and investors will see first hand that Physical Gold in large quantities is just not available.
The physical Gold market is not as transparent when it comes to the Western physical Gold market. But from the data that is available it looks as though Gold is disappearing from the vaults in New York and London.
Massive Short Squeeze Coming?
The problem is that the Comex does not have enough registered Gold in its vault to support all the paper contracts. Even if only a small percentage of traders and investors wanted to take delivery of the Gold it would be huge problem and likely cause the Comex to default. Contracts would then have to only settle in cash.
Because of the limited supply in the physical Gold market, if just one person took delivery on a large Gold contract, it could cause a run on the Comex, where prices would likely surge.
It is difficult to speculate how this will all end because we have never seen such high ratio’s of paper claims compared to available physical Gold. However, its a bullish development for those who own physical.
Gold Supply and Demand vs The Gold Price
One of the more interesting dynamics happening in the Gold and Silver markets right now is that you have record demand in some countries for the physical metal, yet the price continues to trade flat to lower.
By looking at the above data we can see that the ability of the exchanges to sell non existent Gold is endless. The precipitous drop in available physical Gold in the last few months shows that the supply and demand pricing mechanism for the Gold market is not operating properly. This could be due to the way the paper exchanges operate.
Some argue that the reason the price of Gold is not rising in the face of strong physical demand is that western speculative investment demand from hedge funds and large institutions is not present in the Gold market right now.
This is a valid point. However, it does not address the demand and supply imbalance in the market. The low Comex and LBMA inventories suggest that the large demand for physical bars in not being met, as there are not enough sellers willing to part way with their metal at these prices. In a normal market this would mean that prices would need to be higher.
The last point is that some believe that the high physical demand is being off set by declining inventories at the major Gold exchange traded funds. In other words, investors in Gold ETF’s have been selling their positions. There also could be some truth to this.
However, the audit practices of these funds is unclear and not very transparent. Who knows how much Gold is really in these ETF’s. The Gold that is coming off the market in the West from the ETF’s is likely being shipped to China. Ultimately the Gold is just changing hands and not really affecting supply.
Drawing Some Conclusions
In our view the declining inventories on the exchanges is a positive development for Gold. When it comes to Gold, physical supply and demand matters in pricing.
As more investors loose confidence in the global economy and financial markets demand for physical Gold will continue to rise. Sooner or later the lack of supply in the Gold market is going to be reflected in the price. We’re not there yet, but from looking at data on available physical Gold supplies the time is coming soon.
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