We saw a little more activity at the COMEX last week with one medium-sized deposit (around 33,000 ounces) at the HSBC warehouse. Interestingly enough, this was similar to a deposit made exactly one week earlier of another 33,000 ounces. Other than that we saw registered stocks losing about half their gain from the prior week, but nothing too exciting this week. We'll also take a brief look at COMEX interest, which has been declining over the last few weeks. Finally, we'll briefly put it all into perspective as we analyze Friday's huge gold market sell order and compare it to total COMEX gold inventories.
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 (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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Increase in Eligible Gold but Registered Gold Loses Half of Last Week's Gains
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
As investors can see, last week we saw a 43,188 decline in registered gold which was primarily a change of status of registered gold to eligible gold from HSBC's and JPMorgan's warehouses. Eligible gold increased on the week by 97,740 ounces which pretty much neutralized last week's change, which was also the largest increase in registered gold in quite some time.
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).
As investors can see, owners-per-registered ounce declined over the last month to approximately 51 owners-per-registered ounce from a high of around 58 a few weeks ago. This decline was primarily due to declining COMEX open interest, but is still close to all-time highs especially since before this year we've never seen above 40 owners-per-registered ounce - even during the spike in gold in 2011.
Friday's Huge Gold Trade
For investors who haven't heard yet, Friday's (10/11/13) huge drop in gold was essentially due to one tremendously large market sell order, which was an attempt to sell 5,000 gold futures (500,000 gold ounces or about $650 million dollars) at market price and was so large it tripped the stop logic for the exchange and caused gold to stop trading for about ten seconds. We aren't going to get into the motives behind this trade other than saying no seller trying to get a fair price for their gold would sell in such a way, so it looks to be an attempt to ignite negative momentum - which it didn't seem to do.
But what we want to point investor attention to is that the size of this trade compared to the size of COMEX gold registered inventories, was tremendous. In fact, it represents almost 70% of gold registered for delivery and would be almost impossible to actually fill if entities asked for delivery.
Oh! and investors shouldn't forget that this was all done in less than one minute - essentially all of the COMEX gold eligible for delivery was sold by one trader in less than one minute. If that doesn't raise an investor's eyebrows, then they really don't understand or are the ones making that sell order.
What does this Mean for Gold Investors
In short the story hasn't changed for gold investors in terms of the bullishness seen in the extremely low levels of COMEX gold inventories. But what investors should realize is that the electronic volumes that are being traded are so much greater than COMEX gold available for delivery. They should also note that there is an obvious attempt to push the price lower by entities with short positions - after all how else can you explain a 5,000 market sell order with no news during relatively thinly traded hours other than an attempt to ignite negative momentum?
So extremely low physical gold stocks available for delivery and entities with large short positions trying to push the price lower with huge market sell orders is not a recipe for a stable market. At some point we're going to have a scramble for the physical gold as either someone decides to call the bluff of these large shorts trying to push prices lower (think Icahn versus Bill Ackman), or the physical demand from Asia (Hong Kong reported tremendous gold import numbers during August from the US and Switzerland) is going to overwhelm the paper traders and force a cover. Either way we believe that the instability in the gold market is going to cause a sharp, sudden, disorderly rise in the gold price.
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, 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). Finally, investors who own shares in some of the market ETFs (like SPDR S&P 500 (SPY), PowerShares QQQ (QQQ), and SPDR Dow Jones Industrial Average (DIA)) may want to consider buying gold as a hedge for these positions because the fundamentals are still very strong for gold.
With gold physical inventories available for delivery at such low levels, and entities actively trying to push the prices lower without the ability to back up their trades, gold still offers investors terrific potential. At this point, even the traditional investment crowd may take a keen interest in calling the bluff of some of these shorts especially as the investments like SPY are close to all-time highs.
We believe in the near future investors will look back and wonder why they didn't see the gold price rise coming, but all the signs are in place and it is simply a matter of patience.