Last week we saw one of the largest rises in COMEX registered gold stocks in months as a large amount of eligible gold was transferred to registered status from the HSBC, JP Morgan (JPM), and Scotia Mocatta warehouses. Though one week certainly does not make a trend, we may be seeing a change in the pattern of the COMEX warehouse participants. But we do note that the vast majority of the action last week was simply changing the status of existing COMEX stocks of gold - very little was added.
Keeping track of COMEX inventories is something that is recommended for all serious investors who own physical gold and the gold ETF's (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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Large Transfers of Eligible Gold To Registered Status
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 a large rise in registered gold inventories as 196,990 ounces of registered gold were added to COMEX inventory stocks - the vast majority of being transferred from existing eligible gold stocks. The net change of actual gold inventories was an unimpressive 2,227 ounces.
We may be seeing a change in the behavioral pattern of multiple COMEX gold warehouse participants as registered gold inventories have increases over the last three weeks, but we'll have to see more data before that conclusion can be safely drawn because this wouldn't be the first time we've seen registered stocks rise only to fall to lower levels than they started.
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).
The large increase in registered gold stocks over the last few weeks has caused the owners-per-registered ounce ratio to plummet from well over 100 a few weeks ago to 58 owners-per-registered ounce.
Another thing that investors should notice is that even though the gold price increased around 2% for the week, COMEX open interest saw a small decline from 37.63 million ounces to 36.95 million ounces. As we've mentioned before, rising prices on lowering open interest suggests short covering but since the COMEX is absolutely not the only determinant of the gold price this is a mere "suggestion" and not a definite explanation of what is going on in the gold market.
Conclusion for Gold Investors
After the month of January saw the largest COMEX withdrawals since April of last year, February starts off with large transfers of eligible gold to registered gold status, but little actual total deposits or withdrawals.
The increased registered gold inventories drops the registered gold owners-per-ounce ratio back down to 58 - much lower than the 110 owners-per-registered ounce we saw only a few weeks back. Though we do note that 58 is still an extremely high ratio from a historical perspective and we're far from having a normal owners-per-ounce ratio.
Investors should continue to monitor these developments at the COMEX, especially if we're seeing a change in behavior from the participants - though it's too early to come to that conclusion. At this point we have no reason to change our stance in terms of the COMEX inventories, investors should be bullish and we recommend positions in physical gold and the gold ETF's (SPDR Gold Shares , 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 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.
Let us pay close attention to what happens with COMEX inventories over the next few weeks as we see if the behavior of participants has changed from removing COMEX gold to adding it to the warehouses. We saw a lot of gold change status last week, but very little actual physical transfers, removals, or additions and time will tell if this is ultimately just book-based action or if actual physical gold stocks will start being added or removed from the warehouses.