Last week we noted that registered gold inventories saw a large drop as action in the JPMorgan (JPM) warehouse started to get heavy, while this week we saw more of the same but at significantly higher levels. Registered gold inventories plummeted to the lowest levels on record under 500,000 ounces - a stunningly low level for registered gold. Additionally, almost all of the activity involved the JPMorgan warehouse as someone (we believe the JPMorgan house account which we will explain below) is transferring all the gold they can get their hands on into undeliverable eligible gold.
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, 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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Deliverable Gold Plummets by Almost 30%
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
As investors can see, the drop in registered gold is getting to very interesting, and perhaps alarming levels, as they close the week at 432,612 ounces - which is the lowest we've ever seen and an almost 30% decline from the prior week!
But the gold isn't being removed from the COMEX warehouses anymore, instead it's being transferred. We're even seeing gold added, but none of it is going into the available-for-delivery registered gold category - it's all going into eligible gold stocks.
Maybe the most interesting thing is the vast amount of gold being delivered to the JPMorgan warehouse.
This gold is almost all being pulled from the other warehouses (Scotia Mocatta, HSBC, and MTB) and being transferred to the JPMorgan warehouse and is no longer available for delivery. This also follows the pattern of recent behavior of JPMorgan that we are seeing in the CME's Daily Delivery Reports, which shows them stopping many contracts (standing for delivery) from their house/proprietary trading account.
We find this behavior very odd and it seems to suggest that JPMorgan may be much more bullish on the gold price then they are outwardly showing. Why else would they be amassing large amounts of gold in their eligible gold warehouse accounts and standing for delivery for their own house account (with much of the gold coming from the JPMorgan client accounts)? There's more to be said about this (I hope to write about it in a future article) but for now we have to note that the bank is asking for a lot of physical gold from anywhere it can get it from.
This brings us to perhaps the most stunning thing in the recent week's action - the parabolic rise in owners-per-ounce or the registered gold cover ratio
COMEX Gold Open Interest and Registered Gold Owners per Ounce
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).
Open interest is starting to modestly increase, but the large decline in registered stocks caused the owners-per-registered ounce ratio to jump to its highest ever at 91.8 and approaching the unbelievable 100 owners-per-registered ounce level. Let us repeat that - it means that for every 91 ounces of contracted gold only ONE ounce is actually available for delivery. This is really uncharted territory and shows the vast amounts of claims that are now present on fewer and fewer ounces of registered gold - 100 claims per ounce is high by any historic standard.
Conclusion for Gold Investors
Even as the price of gold falls to $1200 per ounce and further, what we're seeing at the COMEX warehouses is anything but panic selling of gold. Gold is being transferred from registered gold stocks to eligible gold, and gold is even being added to warehouse stocks - but it doesn't seem that anybody wants to offer it for delivery as deliverable stocks plummet by 30% on the week to the lowest levels on record. That doesn't seem to follow the narrative that gold is being sold hand-over-fist to anybody willing to take it, in fact if you didn't know the price of gold you'd think that it is much higher than it is because outstanding claims are increasing on each available ounce.
Additionally, JPMorgan eligible stocks (read NOT available-for-delivery) are increasing as the bank stands for delivery for its house account, and it seems to suggest that someone at JPMorgan wants physical gold and is draining all the other COMEX warehouses to get it - and they don't want to make it available to others for delivery anymore.
Finally, what we're seeing in the owners-per-registered ounce ratio is a parabolic surge as traders trade contracts that are backed by less gold - we just hit 91 contract ounces of gold for every one ounce of deliverable gold.
Yes the gold price is dropping, but why anybody would sell physical gold now is beyond us - if anything these signs are pointing to stress in the physical markets. We know it is hard (it always is hard to buy during bottoms - that's why most people miss them), but gold investors should hold tight and even accumulate more physical gold and the gold ETFs (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), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG). We remind precious metals investors that they should not speculate in miners, and even the ETFs until they own at least a little physical gold - invest in gold don't speculate in it at this point in time.
We don't know what will happen with the gold price short-term, but what we do know is that we're seeing unprecedented low levels of registered gold inventories, surging claims per ounce, and JPMorgan demanding large amounts of gold for delivery to their own house accounts - all of these are reasons to buy not sell.
Gold investors should ask themselves, if you had never owned gold in the past (and thus not experienced a 30% correction) and knew what you know now, would you buy gold today? That is the way investors should always evaluate their investments, and for us the answer is obvious - we would and are buying gold and gold investments hand-over-fist.