- COMEX gold inventories show small decline for the week which continues to show changing behavior.
- Total gold inventories of 7.1 million ounces are close to near-term lows even as the price of gold and COMEX open interest rises.
- No reason for long-term investors to change their bullish position on gold until gold inventories start to rise.
Compared to the price of gold, which saw a big rise last week, it was a relatively slow week in terms of COMEX gold inventory action as we saw a small decline in total gold inventories. We saw gold withdrawn from the Scotia Mocatta warehouse on the week, while the HSBC warehouse saw a rise in its eligible inventories, and the rest of the warehouses were quiet. Almost all the action was in eligible gold inventories, while registered gold (deliverable gold) was essentially unchanged on the week.
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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Fourth Straight Week of Eligible Gold Declines
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 small increase in registered gold inventories as 3,231 ounces of registered gold were added to COMEX inventory stocks, which is a very small move in this category of inventories. On the other hand, eligible gold stocks saw a small decline of 21,129 ounces on the week, which makes this the fourth straight week of eligible gold decline. The net change in the COMEX gold inventories was a loss of 17,898 ounces of gold, which negated last week's small rise in total inventory stocks.
Investors should remember that at 7.1 million ounces of COMEX gold inventories, we're still at relatively low levels compared to the last few years, and only a bit of 200,000 ounces from our recent lows achieved in September of 2013.
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).
We saw a slight rise in the owners-per-registered ounce ratio, as it rose from 58 last week to 59.7 this week, primarily from a rise in COMEX open interest versus a drop in registered stocks.
Unlike last week which saw the gold price rise 2% while COMEX open interest declined, this week saw around a 4% rise of gold coupled with an increase in open interest from 36.95 million ounces last week to 38.18 million ounces this week. While far from the highs of over 60 million ounces of interest in 2010, it is a good sign for gold bulls to see COMEX open interest rise with the gold price.
Conclusion for Gold Investors
Last week saw a large increase in the price of gold, but in terms of COMEX gold inventories, we saw very little action as a small 17,898 ounces of gold was withdrawn from COMEX warehouses on the week. COMEX stocks remain close to recent lows as they total 7.1 million ounces of total gold inventories, compared to 6.86 million ounces which are the recent lows seen in September - the COMEX is far from recovering some of the stocks it lost in 2013.
What we want to see now with a stronger gold price is what will happen with total inventory stocks - will we start to see them replenish or has that gold that left in 2013 gone for good? This will be even more important if the gold price shows further strength and COMEX open interest begins to rise because rising interest means more claims on existing registered gold stocks - is our new normal 60 owners-per-registered ounce or will it drop back to more normal levels of around 10 to 20 claims per registered ounce?
Either way we think that investors remain bullish on gold and we continue to recommend positions in physical gold and the gold ETFs. While we've been recommending investors looking for leverage to consider the gold miners such as Goldcorp (GG), Agnico-Eagle (AEM), Eldorado Gold (EGO), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG); at this point many of those names have risen quite a bit and we wouldn't be surprised to see a pullback especially if the general markets start to show weakness.
For us to change our bullish position on gold based on COMEX inventories, we would want to see both registered and total COMEX gold inventories rise. Of course, the financial landscape at that time would play a role in our analysis, but all else equal, that would be something that would be a negative for gold in our eyes. At this point, we are not seeing significant rises in COMEX inventories, and even though claims-per-registered ounce has dropped, it is far from normal levels. Thus we see no reason, based on COMEX gold inventories, why intermediate to long-term gold investors should change their bullish view of gold.