Last week was a quiet week at the COMEX gold warehouses with only two major transactions taking place. HSBC added a good chunk of gold to its registered stocks, while JPMorgan (JPM) continued its aggressive accumulation of gold from other warehouse as it transferred a huge amount of gold from Brinks. The net of these transactions was a new low in registered gold stocks as the COMEX warehouses now hold less than 400,000 ounces of registered gold.
We'll examine these transactions in more detail, but 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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: COMEX Registered Gold Stocks Hits a New Low
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
As investors can see, last week's action has been the normal state of affairs in the COMEX gold warehouses for the last couple of months as eligible gold stocks increase but registered gold stocks decline. For the week, eligible gold stocks increased by 77,847 ounces, while registered gold stocks (gold available for delivery) decreased by 46,426 ounces.
Finally, we have to note that the JPMorgan warehouse (we don't know if it is a bank owned account or a client account) continued its aggressive accumulation of other people's gold as it transferred 89,757 ounces of gold from Brink's eligible account into JPMorgan's registered account - effectively removing this gold from being available for delivery. In fact, we haven't seen JPMorgan's warehouse make any of its gold stocks available for delivery since late September, it's simply been a steady accumulation of gold into the warehouse.
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).
Not surprisingly, considering the huge drawdown in registered gold stocks, the owners-per-registered ounce ratio surged to an all-time high of 111.6 claims per registered gold ounce! Yes that means if less than 1% of COMEX outstanding contracts stand for delivery there will not be enough gold to meet the delivery requirements. Of course gold could be transferred from eligible stocks to meet this request, but that cannot be depended on since eligible gold has no obligation to be used to fulfill delivery.
One more interesting thing investors should note is that "Open Interest" is beginning to rise, which signifies more participants are entering the gold market. It's still a little early to signify a trend change in open interest, but it is definitely something for investors to note. Rising open interest coupled with both a rising gold price and an extremely high Managed Money short position, are a formula for a sharp rise in the gold price - we'll keep our eyes on this moving forward.
Conclusion for Gold Investors
How far can this drop in COMEX registered gold inventories go? We're not sure, but any time we see all-time lows in available gold and all-time highs in claims on that gold we'd rather be an owner of the asset than a seller of it.
Thus we see no reason based on the COMEX warehouses to be bearish of gold, and we continue to suggest investors increase positions in physical gold and the gold ETFs. 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 Pan American Silver (PAAS). We remind precious metals investors that they should not speculate in miners, and even the ETF's until they own at least a little physical gold.
Money managers and many retail investors have significant short positions in gold based on the poor chart performance of gold over the last two years, but all the other fundamentals suggest a rising gold price. We believe these participants are very late to the party, and are putting too much faith on technical analysis when fundamental analysis is very bullish in the medium to long-term - they may find out fairly soon why the fundamentals eventually trumps the technicals.