In last week's analysis we discussed the large JPMorgan (JPM) warehouse gold withdrawal (a stunning 321,500 ounces or 10 tonnes). This week we saw the same large withdrawal. Additionally, we saw HSBC convert some eligible gold into registered gold inventory, which led to the large rise in registered 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, 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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Registered Gold Gains But Eligible Gold Sees Large Withdrawals For Second Straight Week
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 saw another rise in registered gold by 64,761 ounces which was all due to a 64,761 ounce transfer in the HSBC warehouse. But the most interesting thing about this week's action was that it seems the same JPMorgan client (or house account) withdrew another 321,500 ounces for the second straight week, and based on the fact that these were kilo-bars, we think they are headed off to Asia which would be similar to last week's withdrawal.
Similar to last week's withdrawal, these kilo-bars were probably the same ones deposited in the JPMorgan warehouse in October 2013 (three deposits of exactly 321,500 ounces). After this week's kilo-bar withdrawal, it accounts of all kilo-bar deposits deposited in 2013 and so we doubt we will see another large withdrawal similar to that of the last two weeks - at least in kilo-bars.
Finally, we also should point investors to the fact that after all is said and done; the total 622,760 ounces that left COMEX warehouses in January made it the largest month for total withdrawals since April 2013 - in the midst of the gold plunge! Now, we wouldn't read too much into it since the withdrawals were primarily due to two large kilo-bar removals from the JP Morgan warehouse that were deposited a few months earlier - but it is definitely worth noting.
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).
Due to the large HSBC transfer (discussed earlier) we saw a large reduction in the owners-per-registered ounce ratio as it declined from an all-time high of 111.6 claims last week to 85.5 claims per registered ounce this week.
Another thing that we definitely should take note of is the fact that COMEX open interest saw a noticeable decline on the week falling from 41.8 million ounces to 37.6 million ounces. Since gold fell during the week and open interest fell as well, that suggests that there was quite a bit of profit-taking and long liquidation rather than new shorts entering the market. Not much action that an investor can glean from this (I think our trader friends can take more than us from this), but it is worth noting for the possible psychological aspects of the behavior.
Conclusion for Gold Investors
The month of January saw the largest COMEX withdrawals since April of last year (and the great gold takedown), but it was primarily due to two large withdrawals at the JPMorgan warehouse of kilo-bars that were deposited only a few months earlier. So it was probably an entity gathering bars for temporary storage with the intention of shipping it out during these last few weeks. Nevertheless these withdrawals did negate all the COMEX gold inventory increases that we've seen in the last few months, and brought us back down to the levels last seen in October.
The drop in open interest and the HSBC registered gold transfer brings us back down below 100 claims per registered ounce, but we're still at nosebleed levels in terms of this ratio. Additionally, with such low registered inventories we expect to see quite a bit of volatility going forward as any medium sized addition or removal can significantly increase or decrease the ratio.
At this point we continue our stance that in terms of the COMEX inventories, investors should be quite bullish, and we recommend 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.
Going forward it should be interesting to see if February follows January's lead and more gold gets withdrawn from the COMEX, especially if we continue to see jittery markets and a lack of quality alternative assets. One thing we do know is that we remain close to all-time lows in terms of registered gold and it doesn't seem like any entities are depositing much gold into the warehouses to replenish stocks. With such low inventories we can only wonder what would happen if some extraordinary event brought wider investor interest back into gold - there may not be enough to go around at these prices.