Last week, as many of gold investors may already know, we saw the largest one-day withdrawal in over a year as the JPMorgan (JPM) warehouse withdrew a stunning 321,500 ounces of gold (10 tonnes). Additionally, we also saw a large withdrawal from the Scotia Mocatta warehouse, which brings the total withdrawal for the week to almost 5% of all COMEX gold stocks.
We'll examine these transactions in more detail and learn a little more about where that JPMorgan warehouse gold may be going. But we believe it is very important to keep track of COMEX inventories for any 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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Huge Eligible Gold Withdrawals Wipes Out A Month of 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's action finally saw a rise in registered gold by a small 5,002 ounces. But that was paired with a huge 350,968 ounce withdrawal from eligible gold stocks - the vast majority of it (321,500 ounces) coming out of the JPMorgan warehouse.
Now what is really interesting, and hasn't been blogged about too much in most of the gold blogs, is when that gold came in and where it's going.
The first thing to take note of is that the gold that was removed was an exact 321,500 ounce amount - not one ounce over or one ounce under 10 tonnes. That means the gold that was removed was not a standard COMEX bar (100 ounces), but rather kilo bars (32.15 troy ounce bars) - which are the preferred variety for Asian and Middle-Eastern buyers.
Looking at the table above, it is clear that these kilo bars were probably deposited at the COMEX in early December (64,300 times 5 = 321,500) and were just removed this week. Just in case you're wondering, these were the only 64,300 (2 tonnes) deposits in the JPMorgan warehouses in all of 2013 - so I think it's pretty safe to say that it may be too coincidental that this deposit was not the one we saw removed over the past week.
So What Does This All Mean?
As ZeroHedge pointed out, this was not the first time that we've seen such a large removal from the JPMorgan warehouse - in fact we saw the exact same amount removed in December of 2012. So even though this withdrawal was large, it is not unprecedented and thus we shouldn't be too surprised about it.
But what we should note is that since these bars were of the kilo-bar variety and were recently deposited, they were probably refined in the US, stored at the COMEX, and then are on their way to Asia or the Middle-East and are probably not coming back.
Additionally, and perhaps more importantly, we should note that this entity seems to be a different entity than the one we've seen over the last few months that has been buying and standing for delivery of gold from the other warehouses to store it at the JPMorgan warehouse. This entity deposited its kilo-bars in early December and withdrew them all this week, while the other entity seems to be buying standard 100 ounce COMEX bars (not kilo-bars) and removing them from being eligible for delivery (into the counter-intuitive "eligible" status).
So we think this week's massive removal was the standard operating practice of whatever entity is shipping these kilo-bars to Asian (after all the same thing happened last year), but since gold inventories are at much lower levels than they were a year ago, it is making much more of a splash in the gold world. But it does point to the fact that eligible gold is not available for delivery, and in this case, this entity deposited the gold in early December and never had any intention for it to be used to meet delivery requests.
In fact, this is a real-world example of how eligible gold stocks cannot be assumed to be available as registered gold stocks in the case of a future shortage. Many gold commentators who are assuming that our historical low registered gold stocks can simply be replenished with eligible gold stocks are forgetting the fact that the owners of the eligible gold may have no intentions of ever using it for delivery - it's simply being held until it can be used or shipped elsewhere.
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).
Since registered gold stocks were relatively unchanged during the week, it is no surprise that our owners-per-registered ounce ratio remained at its all-time high of 111.6 claims per registered gold ounce. As we said last week, that means if less than 1% of COMEX outstanding contracts stand for delivery there will not be enough gold to meet the delivery requirements. Also, as we mentioned earlier, it may not be as simple as transferring eligible gold into registered gold stocks because that gold may be earmarked for other purposes.
Additionally, we saw COMEX Open Interest rise again from 41.3 million ounces to 41.8 million ounces, not a huge increase but an increase nevertheless. Couple that with a rising gold price and we may be seeing more participants starting to come into the gold market - if prices rise as they come in that suggests that they are coming in on the long side rather than mere short covering (which would reduce open interest). What gold bulls should watch for is longs coming into the market as shorts remain stubborn and refuse to cover - that would set the stage for a possible dramatic upside move. We will keep our eyes out for that.
Conclusion for Gold Investors
The massive JPMorgan eligible gold withdrawal is getting all the headlines, but what we find really interesting is that such a regular business occurrence is affecting the market at a much greater level than it used to. The exact same withdrawal last year didn't generate the same press, and we think that's because COMEX inventories are at a much lower level and the market is getting a bit nervous.
Additionally, investors should also note that this gold that was removed was of the kilo-bar variety and thus was probably heading to Asia or the Middle-East. Secondly, this should be more proof for gold investors that eligible gold is NOT registered gold and thus cannot be counted on to be transferred into registered gold in the case of a COMEX gold shortage. For example, this entity deposited its gold in early December as eligible gold and never changed its status (keeping it ineligible for delivery) until it was later withdrawn this week.
As the shortage of registered gold stocks continues, and the claims on these ounces remain over 100 owners-per-ounce, 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 ETFs until they own at least a little physical gold.
Investors should remember that there are many different entities storing gold in COMEX warehouses that have no intention to ever let that gold be delivered - it is simply there for storage until it can be moved elsewhere as we saw this week. Thus those gold bloggers that are claiming that the all-time low registered gold stocks are meaningless because eligible gold remains, should really rethink that position.
Remember there's a reason why an entity chooses to keep gold as eligible and not registered - it's not a haphazard decision. Additionally, if you were holding eligible gold while registered stocks continued to plummet to the point that it was affecting the market price of gold, would you want to relieve the pressure by making your eligible gold available for delivery? We sure wouldn't and I'm pretty sure anybody who wanted to see their gold inventories worth more money wouldn't either.
If investors will take anything from this week's deliveries, it should be the following: Eligible gold is not registered gold and cannot be counted on to replace registered gold stocks. So next time you read that "paper-bug" blogger mention how meaningless low registered gold inventories are since eligible gold inventories still exist, copy and paste the above-mentioned line and ask them (politely) why an owner holding eligible gold would want to make it available for delivery to help someone who can't make a delivery request.