It has been a while since we've published an article about the COMEX gold inventories simply because action hadn't been particularly interesting. But it has been a month since our last analysis, and since we still think it is a very relevant measure to keep track of the gold market, we'll take a look at what has been going on over the last month.
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 or increases may signify extraordinary events behind the scenes that would ultimately affect the gold price. Investors should remember that the gold market is surprisingly opaque for a market that is one of the largest in the world - any data that provides insight into this market should be monitored by serious precious metals investors.
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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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 Month's Changes: Large Amount of Gold Transferred to the Registered Category in April
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
Source: Hebba Investments Research
As investors can see, the last month of action has seen a large increase in registered gold inventories, as they have increased from 637,592 at the end of March to 792,289 (around 25%) in the last week, which is also the last full week in April. Eligible gold inventories have also risen from around 7.7 million at the end of March to close to 8 million in the last week, or about a 5% increase.
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 registered gold inventories have almost doubled from their lows, we've obviously seen a decrease in the important owners-per-registered ounce ratio, as it dropped from a high of close to 120 to around 48 as of last week. We've also seen a slight decline in COMEX open interest as it has fallen from the 40 million ounce level to 37.8 million ounces of contract gold.
As gold bulls we like to see high owners-per-registered-ounce ratios, as it means few physical ounces per contract ounce, so the fact that it is falling is negative in our view. But we would definitely caveat that with the fact that even at our "low" levels of claims on the physical ounces of gold, we are still at levels that are extremely high. In fact, before last year we had never been at even 40 owners per registered ounce - so we are falling from historically unheard of levels to extremely high levels. So the trend is down, but the levels of claims are still very high.
Conclusion for Gold Investors
The rise in both registered and total COMEX gold inventories suggests that a lot of the stress in the COMEX gold market is starting to subside. As gold bulls, we would rather see much higher levels of gold claims and much lower levels of registered gold inventories, and so the trend is against what we like to see.
We think part of this is related to gold premiums declining in the Chinese gold market, wherein some manufacturers and banks that were taking advantage of the premium differential in both markets to buy COMEX gold and ship it to China have paused those actions, which results in higher inventory levels and less withdrawals.
Even though the trend on the COMEX is suggesting that the physical gold inventories are increasing and stress is declining, we are still very bullish on gold based on the COMEX data (there are many other reasons to be bullish on gold outside of the COMEX that are beyond the scope of this article). Why is that?
First of all, even though we're seeing a rise in inventories (and decline in claims per ounce), we're still at extremely high levels and we're not even close to historic norms in any of these data points. For example, before June of 2013, we were never below 1 million registered ounces of gold - so the fact that we are approaching 800,000 ounces is not particularly bearish.
That brings us to the second point - very rarely do major trends not see micro counter-trends within their lifespan. We don't go straight up nor do we go straight down, and we wouldn't be surprised to see inventories start to decline quickly if there is a catalyst that starts to increase physical gold demand beyond current levels (think stock market drop, increase in Ukrainian tensions, etc).
So even based on the recent rise in inventories and decline in claims per ounce, we still think investors would be wise to maintain a strong exposure to gold with positions in physical gold and the gold ETF's (SPDR Gold Shares (NYSEARCA:GLD), PHYS, CEF). We're also starting to warm up a bit on the miners as their recent decline has made some valuations attractive based on our belief in a higher gold price. Investors looking for that leverage may want to consider evaluating gold miners such as Goldcorp (NYSE:GG), IAMGOLD (NYSE:IAG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as First Majestic (NYSE:AG) (we're not suggesting these companies specifically - only suggesting them for further investor research).
As we see interesting developments in COMEX markets we will continue to publish our analysis, but right now we believe investors would be well-served to continue increasing positions in gold in a measured, disciplined fashion.
Disclosure: I am long SGOL, AG. 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.