In the last month we've seen relatively little action on the COMEX and last week did nothing to change this trend. In fact, compared to last February's action, slow may be an overstatement as we've barely seen a net change of 50,000 ounces, while last February over 600,000 ounces of gold poured out. We can't say we're too surprised as we've had a lot of negative action in the gold price over the last year, and now the rising gold price may have stabilized the COMEX inventories as buyers may be a bit hesitant and weaker sellers have sold.
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, 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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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: Slow February Concludes With a Net Change Under 40,000 ounces
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 decrease in registered gold inventories as 10,994 ounces of registered gold were removed from COMEX inventory stocks, which reversed the previous two weeks registered gold additions. Total gold increased by 11,831 ounces, which was the second straight week of a net increase and was primarily due to a 22,227 eligible gold inventory addition to the HSBC warehouse stocks.
We close February with a net 35,702 gold ounce addition to total COMEX gold inventories, which is a very small addition compared to the action we've seen in previous months. Things seem to be stabilizing a bit in terms of inventory additions and removals but investors should remember that at a little under 7.2 million ounces of COMEX gold inventories, we're still at relatively low levels compared to the last few years, and only 300,000 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).
Since our last report, we've seen a slight rise in the owners-per-registered ounce ratio, as it rose from 59 to 61 this week, primarily due to a small drop in registered gold inventories. COMEX open interest has been relatively stable over the past month and remains around 39 million contract ounces, which seems to suggest to us that both the bulls and the bears are lacking conviction and are highly uncertain about the next move in the gold price.
Conclusion for Gold Investors
With this report we conclude a slow February that saw little action in COMEX gold inventories as total gold stocks remain around 7.2 million ounces and the total net change for the month was a mere 35,000 ounces, which is significantly less than the over 600,000 ounces we saw removed last February. We believe that COMEX open interest is also showing this same stabilization as total contract ounces remain around 39 million gold ounces.
One important thing we are noting is that this stabilization is that it seems that both bulls and bears seem hesitant about their next moves and nobody has enough conviction to "push" the gold price either way by establishing a large long or short position. We believe this may make gold less influenced by COMEX speculators, and more influenced by exogenous events since no large traders seem confident enough to increase positions on either the long or short side. This may mean some of the geopolitical issues we are seeing in the Ukraine may have a major effect on the gold price as lackadaisical bulls and bears will not take the other end of a bullish or bearish geopolitical outcome. Thus we believe that Ukrainian-Russian events will be a significant determinant of the gold price in the upcoming weeks - even more so than if we saw some conviction on the short or long side.
Gold has had an excellent run to start off 2014 and has risen around 10% year-to-date, handily beating most other investments. But with the increasing geopolitical certainty and the lacking conviction by paper bears and bulls (i.e. COMEX traders) as evidenced by the stable open interest positions, we believe now is not a time to sell gold investments. We feel that Ukrainian-Russian tensions have not seen their peak, and thus we remain bullish on gold and we continue to recommend positions in physical gold and the gold ETF's (SPDR Gold Shares (NYSEARCA:GLD), PHYS, CEF).
We would take a more conservative view on the miners as risk-off trading may also cause them to experience much more volatility than the underlying gold price, and they may track stock market returns (which could and should be negative with rising geopolitical tensions) more than gold and silver. But they usually do provide leverage to the gold price so more risk-tolerant investors may want that extra leverage and consider the gold miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as First Majestic (NYSE:AG).
Watch geopolitical events in Europe and Russia closely as the lacking conviction in bulls and bears may cause these events to have an outsized effect on the gold price. Right now, we believe that tensions still could escalate much further and that would be a significant risk-off series of events for markets, and also a positive catalyst for gold - without strong handed shorts we could see a major rise in the gold price fairly quickly.