We have covered the rapidly declining COMEX gold inventories in previous articles, and last week they dropped below 7 million ounces for the first time since 2007. This week we only had a minor drop, but gold seems to still be leaving the COMEX for parts unknown.
This is something that should be very relevant to investors who own physical gold and the gold ETFs (GLD, PHYS, and CEF) because any abnormal inventory declines may signify extraordinary events behind the scenes that would ultimately affect the gold price.
As you can see on the chart above, both registered and eligible gold stocks have been declining significantly since the beginning of 2013, and they continue to decline at rapid levels. 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on behalf of banks and their clients and can be used to settle futures contracts transferred between clients or withdrawn from the warehouse.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. There is a lot more to glean from this information but for the purpose of this article we will focus on the gold drawdown.
Gold Continues to Leave the COMEX
Before we look at the numbers, we have to give a plug to the folks at http://www.troyozgold.com who provided important data that helped to contribute to this article. Their site is free to use and provides investors with terrific information about COMEX inventories, ETF inventories, and a lot of other data about everything related to the gold and silver markets - investors should check it out.
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
As you can see in the chart above, we have been seeing consistent declines in gold inventories for the last six months. Last week's drop was not as large as prior week's drop, but it was still a drop nevertheless, where around one tonne of gold left the warehouses. In the reporting week ending on 7/26, gold stocks dropped by 32,424 ounces for the week which left COMEX inventories at a new yearly low of only 6.96 million ounces - the lowest it has been since the beginning of 2006.
Registered stocks dropped by just shy of 200 ounces on the week, but they are still at their lowest levels since data has been published - pre-2002 levels.
Keep in mind that registered gold is the only gold available for delivery at the COMEX - eligible gold is stored but is not available for delivery. This means that COMEX participants are demanding more gold for delivery, even as other COMEX gold holders are preventing their gold from being eligible to fulfill delivery on settled gold contracts.
As we have mentioned before, we do not know why gold is leaving the COMEX - but we do know it is still leaving in ever increasing quantities. The steep and sustained nature of this decline suggests that it is not a haphazard event - multiple players are withdrawing their gold in large amounts and there must be a significant reason why they are doing it.
Analyzing the Numbers Year-to-Date
Let us now take a look at these numbers on a YTD basis.
Year-to-date more than 4 million ounces or 128 tonnes have left the COMEX as investors have pulled their gold - close to a 40% drop in gold inventories. Registered gold (e.g. deliverable gold) has left at an even faster pace as more than 1.3 million ounces have been withdrawn or more than 50% year-to-date. These are extremely large numbers for a market that is not known for large physical deliveries, normally only around 2-3% of COMEX contracts are held for delivery.
What does this Mean for Gold Investors
As we mentioned last week, this is extremely bullish for investors in physical gold and the gold ETFs (GLD, CEF, and PHYS). As COMEX gold stocks drop, there is less gold to satisfy outstanding contracts which may cause a major problem in the future if these stocks are not replenished or the number of outstanding contracts does not decline.
The gold price moved up last week, so there is a chance that we may actually start to see investors putting gold back into the COMEX. But that assumes that the gold that was withdrawn is still in hands of COMEX-oriented investors, if it is not, then we may not see COMEX inventories increase even if gold does pique investor interest.
When the gold price rises what we usually see is an increase in gold contracts traded on the COMEX. As more contracts are traded on the COMEX (assuming gold continues to rise) deliveries tend to increase too. If COMEX gold does not increase as open interest increases, we may start to see the ratio of physical gold backing up paper gold drop significantly.
This can create all sorts of interesting scenarios, especially if the "gold vigilantes" start to smell blood in the water and decide to challenge some of these gold shorts by demanding physical delivery. Registered gold is down to 950,000 ounces, or just over $1 billion. Out of the top 200 hedge funds registered with the SEC, every single one of them has over $1 billion of assets under management (AUM), with the smallest hedge fund having over $3 billion in AUM. That means that every one of the top-200 hedge funds has enough assets to buy every single registered gold ounce at the COMEX and have plenty of assets left over.
What if one, or a group of hedge funds, decides to take delivery of gold and test to see if the shorts can acquire the physical gold to back up their contracts? Yes position limits could prevent a large one-time delivery of all the gold stocks, but there really would be nothing stopping this from happening over time. In addition, registered gold stock levels are so low that this may become a very feasible strategy - there could be a lot of money made if contract longs could force shorts to buy physical gold on the open market. Could this be why we are seeing COMEX gold stocks plummeting?
Speculation aside, we continue to advise investors to increase physical gold positions as the COMEX stocks continue to be drawn down. It is beyond us to understand how investors would take the short side of the gold trade when the gold inventories backing the short contracts are dropping precipitously.
While most investors cannot take COMEX contracts to delivery, they can participate in this extraordinary situation by buying physical gold and the gold ETFs (GLD, CEF, and PHYS). They can also buy the gold-focused miners such as Randgold (GOLD), Goldcorp (GG), and Alamos Gold (AGI). We believe this opportunity will not last for long as the record gold short position may be forced to cover into a strong physical market - which may be quite disorderly and profitable for those willing to go long the shiny and increasingly disappearing (at least on the COMEX) metal.