Last week was a fairly quiet week at the COMEX gold warehouses, with registered gold inventories hitting a new low. This week saw a bit more action in the warehouses, with a net gain in gold inventories for the week, but registered gold stocks hit a new all-time low at a little under 639,000 ounces.
Keeping track of COMEX inventories is something that is recommended for all serious investors who own physical gold and the gold ETF's (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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Total Gold Drops Slightly as Registered Gold Plummets
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
Total COMEX gold inventories increased by 1,608 ounces for the week, which is a relatively quiet week in terms of the change to total COMEX gold. Registered gold inventories continued their downwards march to hit a new all-time low of 638,852 gold ounces. Or for those preferring the tonnage figures, registered COMEX gold sits at 19.87 tonnes - the first time it has ever dropped below 20 total tonnes.
Since total outstanding COMEX gold was relatively unchanged for the week, the vast majority of the action was due to transfer from registered accounts at Scotia Mocatta and Brinks to an eligible account at JP Morgan. This is consistent with the pattern we've seen at COMEX over the last month, gold going from registered status to a JP Morgan eligible account that is not available for delivery.
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).
Investors can see that almost parabolic rise in owners-per-registered ounce, which hit a new high just under 60 owners-per-registered ounce. That last graph just says it all - more and more traders are trading with less ounces of gold truly represented by these trades. People need to remember that only registered gold (not eligible gold) is available to meet delivery requirements - so this chart is going parabolic not in terms of price but in terms of owner claims per ounce of gold.
What does this Mean for Gold Investors
Another week and another new low in registered COMEX gold inventories and another new high in claims per registered ounce of gold.
If we imagined the COMEX as a bank (perhaps not too far from the truth), with registered gold as its available deposits, and COMEX outstanding contract positions as claims on its assets - would we invest in this bank? Would we grade it as healthy? Of course not - in fact if we owned an account with them we would demand our gold as quickly as possible to take it elsewhere.
It brings up the famous financial quote by Hemingway from The Sun Also Rises, "How did you go bankrupt? Two ways. Gradually, and then suddenly." We're not predicting that the COMEX will be cleared out of its gold and declare force majeure, but if it did could we really say that it was an unpredictable black swan type event? No - the signs are all there if people bother to look at the data.
Clearly there isn't much argument that what is going on at the COMEX is pretty clearly bullish for gold. You can argue against gold for other reasons, but not from the standpoint of COMEX inventories.
Therefore we continue to recommend investors continue to accumulate physical gold and the gold ETFs (SPDR Gold Shares 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), Agnico-Eagle (AEM), Randgold (GOLD), or even some of the explorers and silver miners such as Hecla Mining (HL).
Taking a step back and looking at COMEX gold inventories from a neutral perspective suggests a bullish stand on gold. Throw in the fact that registered gold inventories now stand at less than 20 tonnes, while outstanding claims on these inventories stand at close to 1200 tonnes - that seems a bit extreme to us.
We can't say we'd be surprised if in the future investors looked back on the current situation and said, "It happened in two ways: gradually and then suddenly."