Last week was a fairly quiet week in terms of COMEX gold inventories, but that quietness was broken by an extremely large withdrawal of over 160,000 on one day, which led to a large fall in total gold inventories for the week. This week the quietness returned and the only major thing to note was a large transfer of gold from eligible to registered status, though we did hit a new cyclical low for total COMEX gold inventories and we are currently at 2005 levels of inventories.
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.
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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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 Transfer Increases Registered Gold While Total Gold Continues to Drop
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
Last week we saw a large transfer of eligible gold to registered status (making it eligible for delivery) in the JPMorgan warehouse, but total gold held at COMEX warehouses continued to fall for the week and ended the week 7,665 ounces lower.
Registered gold increased by a large amount for the week because of this transfer but, as investors can see in the chart below, the long-term view is this was merely a blip in a continuing decline of registered gold inventories.
Addressing the Argument that COMEX Gold Declines are Irrelevant or Expected
While it is usually difficult when it comes to financial assets to know if something is relevant before it becomes obviously relevant in hindsight, abnormalities and breaks in historical correlations do offer some important things to look for. As we've been saying for quite some time, one of the strangest things about the large declines in COMEX gold has been that it has gone one while silver inventories have generally risen.
We know that investors and producers that buy physical gold and store it at the COMEX are the same investors that buy physical silver and store it at the COMEX - so why not see the same declines in COMEX silver especially since it is more costly to store silver than gold? If gold leaving the COMEX was merely an issue of investors losing interest, then silver inventories would be dropping too - but as the chart below shows, silver inventories have remained at very healthy inventory levels.
This suggests that there is something specific regarding gold that is causing such large declines in inventory. Our belief is that the reason for this large decline in gold stocks is because it is being used to satisfy gold demand outside the United States. Foreigners demand both gold and silver, but their gold demand is much greater than their silver demand and thus we see the significant decline in gold stocks that is not matched by a similar decline in silver stocks.
Regardless of the reasons (which nobody knows), one thing we do know is that the large declines that we are witnessing in gold are not happening in silver or any other commodity that we know of - it is only happening to gold.
So we will continue to track it and maybe in hindsight one day it will be clear what's going on the gold market.
What does this Mean for Gold Investors
For the week, COMEX gold registered inventories rose as there was a major transfer from eligible to registered gold in the JPMorgan warehouse. Maybe this is a precursor to more transfers in gold, but for the week we still saw COMEX gold inventories decline slightly as the transfer didn't result in any new gold being added to the warehouses and parties continued to withdraw gold.
The drama in Washington should continue into the next week so it will be interesting to see if there is any effect on COMEX gold inventories especially as we get closer to the US debt ceiling - which we don't believe will be breached by Congress. 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, 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 (GG), Yamana Gold (AUY), Randgold (GOLD), or even some of the explorers and silver miners such as First Majestic (AG). 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 any particular miner or explorer.