We have covered the rapidly declining COMEX gold inventories in previous articles, but COMEX inventories continued to drop with registered gold inventories hitting their lowest levels ever, though we did see some positive gains in eligible gold on the week.
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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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.
A Slight Increase in Eligible Gold but Registered Gold Continues to Drop
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 table above, we have been seeing consistent declines in gold inventories for the last six months. Last week we actually had an increase in total gold held at COMEX warehouses for the first time in a number of weeks, with a little over 44,000 ounces added to the eligible stockpiles of gold.
Now, let us take a look at registered gold stocks.
Even though we saw eligible gold increase, we actually saw a drop in registered gold stocks. These are the gold stocks that are used to satisfy delivery requests, so the fact that they continue to drop shows that entities that store their gold on the COMEX are continually less keen on using that gold to satisfy delivery requests.
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 126 tonnes have left the COMEX as investors have pulled their gold - which is close to a 40% drop in gold inventories. Registered gold (e.g. deliverable gold) has left at an even faster pace as more than 1.35 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
Though last week's COMEX numbers were nothing extraordinary, we still believe 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 fact that registered gold continues to drop even during a week where eligible gold increased, is a sign that investors value their physical gold and they may feel that gold prices here are not worth trading in that gold for cash.
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 (NASDAQ:GOLD), Goldcorp (NYSE:GG), and Newmont Mining (NYSE:NEM) - though we would emphasize they do their due diligence when purchasing miners. 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.