Last week ended with COMEX gold inventories hovering near all-time lows after seeing slight gains in registered gold ounces, though in eligible gold ounces the weekly gain was of a decent size. As we get closer to December, which is the month that traditionally has the most deliveries, it may get rather interesting with registered inventories at such historically low levels.
Another interesting thing to take note of is that COMEX open interest (the number of gold contracts outstanding) has been creeping up, from 40.2 million contracted ounces to 40.8 million ounces over the past week. This is something quite interesting and we will discuss these things further in the article.
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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Small Increases in both Registered and Eligible Gold
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
As investors can see, last week saw a decent size rise in total COMEX gold inventories as 33,271 ounces were added to COMEX warehouses - which makes this the seventh week in a row that gold has been added to COMEX eligible inventories. Registered gold inventories also saw an increase, but it was a mere 2,180 ounces, which makes it a tiny change and the smallest weekly move in registered gold over the past two months.
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).
Even though registered gold inventories increased slightly over the past week, investors will notice that the owners-per-ounce ratio actually increased during the week to a new all-time high of 69 owners per registered gold ounce. This was primarily due to the increase in outstanding COMEX gold contracts as more traders opened gold contracts during the week.
As we alluded to in our introduction, we've also been seeing the open interest increasing in COMEX gold over the last few weeks, as seen in the 6-month chart below.
In layman's speak, an increase in open interest that is paired with declining prices suggests that new short positions are being opened up because traders are opening new contracts at the bid of the gold price rather than the ask. Many technical traders view this as a bearish sign, though we do note that it also can lead to violent turnarounds as many traders with new positions may quickly close them on price increases. But since we aren't technical traders we note these things but we don't base our investment decisions on them since this is an art rather than a science.
Finally, December has traditionally been the busiest delivery month for the COMEX and this may get quite interesting as registered gold inventories are close to all-time lows, the gold price is at very attractive levels versus its price over the last few years, Indian premiums are again touching highs, and the new Chinese Lunar year approaches. Could major traders be trying to depress the price before December deliveries? We would not be surprised.
What does this Mean for Gold Investors
It is more than likely that 2013 will go down as an extremely down year for gold, but as with any investment, patience is needed and if the fundamentals hold true than there is no reason to sell.
We believe that gold's fundamentals are still very strong and the upside is much greater than the downside. In terms of COMEX gold inventories, we are at all-time lows in registered gold and claims on available gold are at all-time highs and parabolic levels. In our opinion, this is hardly the time to sell and investors should actually be increasing their positions in physical gold and the gold ETFs (SPDR Gold Shares (GLD), PHYS, CEF). 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 First Majestic (AG).
It may get very interesting for gold over the next month as December deliveries come due at a time where registered gold is hovering near all-time low levels. As one of our favorite resource investment icons Rick Rule says, "Precious metals investors have been through a lot of pain over the last two years, do they really want to bail out before the gain?" We completely agree with Mr. Rule and we see it as a great time to be increasing our precious metals exposure - it hopefully shall be very interesting what this December may bring for gold investors.