- The slow action in the COMEX gold markets may be a sign of confusion about the future of the gold price by physical gold participants.
- No action in registered gold markets even with a rising gold price is a bit strange.
- COMEX open interest continues to rise as contract gold traders open new positions.
The slowdown in COMEX gold inventory action continues as the first two weeks in March have really continued what we've seen in February as very little eligible gold has moved (though it has declined) and we've actually seen NO registered gold enter or leave COMEX warehouses. That is a bit surprising considering that gold has had a strong move up in March and the geopolitical worries out of Ukraine should have seen some growth in COMEX inventories - which does not seem to be the case.
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 (NYSEARCA: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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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.
This Week's Changes: March Begins with a Fizzle as No Registered Gold is Removed or Added
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
As investors can see, the last two weeks of action have been quite slow for eligible stocks, and registered gold hasn't even moved. The only change in COMEX gold inventories over the last couple of weeks has been a total 72,000 ounce decline in eligible gold stocks which has led total COMEX gold inventories to decline to 7,104,660 ounces.
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).
As we've mentioned earlier, March has seen no action in registered gold inventories, but we've actually seen a slight rise in the owners-per-registered ounce ratio, as it rose from 61 to 66 over the last two weeks. Why is that? Though inventories haven't moved, COMEX open interest has increased as the gold contract volume has increased from 38.98 million ounces to 42.22 million ounces over the past two weeks. Though this isn't a breakout in volume, the volume trend is definitely up and that is a bullish indicator for gold as interest is starting to pick up.
Conclusion for Gold Investors
Even though action at the COMEX has been extremely slow, this may be of interest (well at least as interesting as no action can be) because we would have expected with a stronger gold price that COMEX gold inventories would start growing just as we saw them decline with a falling gold price in 2013. Or the opposite, with panicked investors continuing their withdrawals of COMEX gold inventories as the gold price rose. But we've seen neither - just dust piling up on the gold bars as little is added or withdrawn and no registered stocks change hands.
What we think is happening here is that the COMEX physical players are a bit uncertain of what to do next, as evidenced by the slowdown in physical activity despite the active gold price.
In contrast, open interest at the COMEX has started to grow and approach levels we haven't seen since mid-July of 2013, as seen on the 1 year chart below.
The key question here is if this pickup in open interest is temporary in nature and primarily due to the situation in Ukraine, or if this is a longer term change in investor interest. If it is due to the Ukrainian situation, then it could quickly reverse if the situation is resolved or de-escalated and so we could see a sizable drop in the gold price as speculators move elsewhere. But if this interest is more long-term in nature, then we could see much higher levels in gold as more traders get into the gold market (remember we've been well over 60 million ounces of gold in the past).
One more important thing to note for gold investors is that we believe that the situation in Russia is not a short-term event that will be forgotten soon. Yes in the short term, a hopeful conference call or conciliatory statement by leaders may lead to a pullback in the gold price, but these events are a symptom of an underlying instability in the global geopolitical order. Investors need to remember that our financial system (in fact our whole economic system) is much more globalized than it has ever been in human history. A breakdown in the geopolitical order could have devastating consequences on our current system.
Thus we believe that investors would be wise to maintain a strong exposure to gold with positions in physical gold and the gold ETFs. As we've stated previously, we would also continue to 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).
We believe that any pullback in the gold price may make a very nice opportunity for investors who have been on the sidelines with gold or who have sold gold too early to try and play the short-term price dynamics.
Disclosure: I am long GG, AG, SGOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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