Over the last few weeks it has been very quiet at the COMEX gold warehouses, but this week we saw one huge withdrawal out of eligible gold stocks that led to a new cyclical low for total COMEX gold inventories, and brought them down to a level not seen since 2005.
Keeping track of COMEX inventories is something that is recommended for all serious 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.
The quiet period over the last month in COMEX gold inventories may be coming to an end as last week saw a large drop in total COMEX gold, though it was only from one warehouse (NYSE:HSBC) that the majority of the gold was removed. 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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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.
This Week's Changes: Large Withdrawal from Eligible Gold Stocks Negates Last Month of Increases
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
As investors can see in the table above, there has been a consistent decline in COMEX gold inventories since December. Last week we saw nothing happen with registered gold stocks, but due to one large withdrawal from HSBC (HBC) warehouses (173,358 ounces were reported withdrawn on 9/24/13), total COMEX gold stocks dropped under 6.9 million ounces for the first time since 2005.
HSBC's Large Withdrawal
This withdrawal was very large and represented almost 3% of total COMEX gold stocks withdrawn in ONE day from the HSBC warehouse. In fact, this was the largest withdrawal we have in our daily records for any HSBC withdrawal - though we'll have to check with Nick Laird to verify this (his data goes further back than our own) and post his response in the comments section.
HSBC has actually fared much better than the other warehouses when it comes to gold withdrawals and actually currently holds the most gold of all COMEX warehouses.
As you can see, HSBC has only lost 20% of all its gold year-to-date compared to an average close to 40% for all the warehouses.
Whenever you have such a large withdrawal of more than 5 tonnes of gold, 3% of total COMEX gold inventories, and 5% of all gold held at the HSBC warehouse in one day, it gets us very curious. Since the withdrawal was done over one day and was from eligible stocks, not registered stocks, it suggests that this was one entity and was not a delivery request but rather a removal of already owned gold.
Are we starting to see gold now hemorrhage from HSBC's warehouse? Or is this an entity that doesn't want to keep their gold in a COMEX warehouse anymore? Or is this an HSBC house account that needs to use the gold somewhere else. We're not sure but it is definitely a very eye-catching withdrawal and we'd be interested to hear if readers have any more insight into it.
What does this Mean for Gold Investors
While a single withdrawal (even of the size of last week's withdrawal) doesn't warrant investors to change their allocation, it sure is interesting and worth noting. But what should be more important to investors is if this is the beginning of a new trend of withdrawals from COMEX gold inventories which have been fairly quiet over the last few months. Eligible inventories are at 2005 levels, while registered inventories (by and far the more important when it comes to measuring COMEX physical gold liquidity) are at all-time lows and under 700,000 total ounces.
Thus we see no reason to change our bullish stance on gold based on COMEX gold inventories, and we recommend investors continue to accumulate physical gold and the gold ETFs (GLD, PHYS, and CEF) while the physical gold supply continues to drop. For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (NYSE:GG) or Randgold (NASDAQ:GOLD), or even some of the explorers and silver miners such as First Majestic (NYSE:AG) and Pretium Resources (NYSE:PVG) (which is a company we've highlighted in an earlier piece). But as we always emphasize, buying gold miners includes many other risks that are not present with owning physical gold, so investors should make sure that they do their due diligence before investing in a particular miner or explorer.
Gold is going somewhere and last week saw 3% of total gold receiving a "Bon Voyage!" from the COMEX. As we watch the gold leave, we cannot help but wonder what happens if we start to see inflation in after this supposed "deflationary", bearish gold environment? If gold is disappearing now, what happens when the investing public actually does want it? Well at least they can't say we didn't warn them.
Disclosure: I am long SGOL, GG, GOLD, AG, PVG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.