Monday, August 3, 2015

Strange Things Are Happening At The COMEX Gold Warehouses


  • Gold available for delivery at the COMEX warehouses has dropped to the lowest levels in the data's history.
  • The number of contract per available ounce has also risen to over 120, which is the highest we have ever seen.
  • The latest data has shown that over 200,000 ounces left the COMEX Kilo-gold warehouses on Thursday alone.
  • This is contrary to what we have been hearing about gold in the press and suggests that physical demand is much stronger than commonly believed.
It has been a while since we've published an article about the COMEX gold inventories simply because action hadn't been particularly interesting. But at this point we think it's a good idea to take a look at some of the COMEX inventory numbers because we've been seeing significant events happening at the COMEX warehouses.
We do believe that keeping track of COMEX inventories is something that is recommended for all serious investors who own physical gold and the gold ETFs (SPDR Gold Shares (NYSEARCA:GLD), Sprott Physical Gold Trust (NYSEARCA:PHYS), Central Fund of Canada Limited (NYSEMKT:CEF), etc.) because any abnormal inventory declines or increases may signify extraordinary events behind the scenes that would ultimately affect the gold price. Investors should remember that the gold market is surprisingly opaque for a market that is one of the largest in the world - any data that provides insight into this market should be monitored by serious precious metals investors.
Now, let's take a look at where COMEX gold inventories stand and what investors can learn from them.

Source: ShareLynx
We will take a closer look at these numbers but let us first explain the COMEX a little more for investors who are unfamiliar with it.

Introduction to COMEX Warehousing

COMEX is an exchange that offers metal warehousing and storage options for its clients. The list of their silver warehouses can be found here and their gold warehouses can be found here. In the case of silver and gold, the metal is stored at these official warehouses on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse. This offers large holders of precious metals a convenient way to store their metal with minimal storage fees - very convenient indeed if you hold large amounts of gold or silver and you don't want to store them in your basement.
Silver and gold stored in these warehouses can fall into two categories: Eligible and Registered.
Eligible metals are those that conform to the exchange's requirements of size (1000 ounce bars for silver and 100 ounce bars for gold), purity, and refined by an exchange approved refiner. Eligible metals are stored at COMEX warehouses on behalf of banks or private parties, but are not available for delivery for a futures contract.
Registered metals are similar to eligible metals except that these metals are also available for delivery to settle a futures contract. COMEX issues a daily report on gold, silver, copper, platinum, and palladium stocks, which lists all the metal that is currently stored in COMEX warehouses and how much eligible and registered metal is present.
This information allows investors insight into how much metal is currently backing COMEX futures contracts, what large gold and silver owners are doing with their metals, and how many clients are requesting delivery of their metals.

Catching Up with Changes in COMEX Gold Inventories

Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
(click to enlarge)
As investors can see in the chart above, we've seen a major drawdown in COMEX inventories over the past few months, which has accelerated in July as the gold price has dropped. The 351,519 registered ounces of gold is the lowest that we've seen at the COMEX since our records started. Investors need to remember that registered gold is the only gold available for delivery unless someone moves eligible gold into the registered category - that is very little gold backing a huge amount of open contracts!
Finally, on Friday we saw a huge amount of gold leave the gold kilo stock warehouses.
(click to enlarge)
Source: CME Group Kilo Gold Stocks
These stocks aren't used to back up COMEX contracts and they are kilo-bars, but a 222,581 ounce withdrawal is a HUGE amount to go out in one day - a little more than 20% of the total warehouse holdings. Since these are kilo-bars, preferred by Asian buyers, this suggests that there may be much more demand from Asia than some analysts have been reporting.

COMEX Gold Open Interest and Registered Gold Owners per Ounce

Finally, let us take a look at possibly the most important number when it comes to COMEX gold inventories - the registered gold cover ratio. We've discussed this in-depth in a previous article so please refer to that article for details, but in a nutshell it is the amount of investors owning a claim to each registered gold ounce (i.e. owner per registered gold ounce).

Source: Sharelynx
As investors can see in the graph above, registered gold stocks have dropped to levels where only 1 ounce of registered gold is backing 121.67 claims on that ounce - the highest levels we've ever witnessed.
This is something that gold bulls should love to see as high owners-per-registered-ounce ratios mean fewer physical ounces per contract ounce - a definite positive. In fact, before last year we had never been at even 40 owners per registered ounce - so we're truly entering uncharted territory.

Conclusion for Gold Investors

While the gold price has declined and many former bullish analysts have been falling over themselves to call a lower gold price, COMEX gold stocks have quietly fallen to their lowest levels in the history of our records. At around 350,000 ounces of registered gold (i.e. available for delivery), we're starting to get to dangerously low levels especially considering that COMEX open interest is relatively stable.
To put that in perspective, the total value of the gold available for delivery in COMEX warehouses is only worth around $390 million - a medium sized hedge fund could purchase all of it and have plenty of cash left over. In fact, in the orchestrated plunge in gold a few weeks ago, more money was spent in ONE minute ($2.7 billion) than all of the registered gold stocks at the COMEX - that's some serious paper trading.
While we don't expect a failure to deliver to happen at the COMEX, it gets much more interesting when gold stocks fall to these really low levels.
Also, we find it a bit strange that if gold demand is really significantly lower and investors are selling gold hand over fist, then why exactly don't we see rising registered stocks? After all, none of this gold is used in industry so if investors sell it then it has to be held somewhere else, and the COMEX would be the most logical place. Maybe physical gold demand isn't as weak as is suggested by some analysts.