COMEX deliveries and registered gold (silver too)

For over a month, JPMorgan managed to mysteriously avoid matching up the gold held in its (world's largest) vault with the Comex delivery notice update. However, as of today, that particular can will be kicked no more. Starting yesterday, JPM reported that just under 12,000 ounces of Eligible gold (the same Registered gold that two days earlier saw its warrants detached and convert to eligible) were withdrawn from its warehouse 100 feet below CMP 1. But it was today's move that was the kicker, as a whopping 90,311 ounces of eligible gold were withdrawn, accounting for a massive 66% of the firm's entire inventory of non-Registered gold, and leaving a token 46K ounces, or a little over 1 tonne in JPM's possession.

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A journalist on scene on Wall Street this evening has just sent us footage of a massive fleet of Firetrucks and ambulances in front of JP Morgan’s headquarters at 1 Chase Manhattan Plaza, with fire-fighters stating they are responding to a COMMERCIAL VAULT FIRE IN THE BASEMENT!

With JPM’s gold inventory plunging 66% Friday to an all-time low of 46,000 ounces, and with reportedly over 502,000 ounces still standing against JPM for the JUNE gold contract, is the long anticipated force-majeure event in progress?

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Gold derivative distortions
2013-JUL-21

The purpose of this article is to explain how derivatives have distorted gold prices with particular reference to the US futures markets. This will enable us to anticipate the price effect when the distortion is eventually unwound.

When a derivative is created it diverts supply and demand from the underlying commodity. If it is then hedged into the underlying commodity the price effect is the same as if it was a simple commodity transaction. Enter the “honest speculator”, who is neither producer nor consumer, but seeks to profit by trading derivatives for profit, without an intention of taking delivery. The speculator who does not roll his positions into subsequent future contracts brings forward demand or supply only to reverse the price effect later in the life of the contract. In this case speculators provide liquidity with no lasting price distortions.

So far we have considered markets which are essentially free. In the US futures markets, this changed when banks were permitted to act as “commercials”, despite the fact they are in fact speculators in the original market definition. The nature of the futures market changed from this moment to one where speculative positions have become more or less permanent.

In the case of gold and silver the banks have absorbed physical demand by continually running net short positions. We cannot say that all of this demand would have existed without the banks’ intervention; however there is no doubt that the expansion of the overall market by the addition of permanent short positions has led to lower prices overall than would otherwise be the case.

If futures markets are not to distort prices on a prolonged basis three conditions must apply: every player must be motivated only by profit, the banks must commit only their own resources and no one else’s, and there must be periodic liquidation of speculative positions. Instead, there is little doubt that there is political intervention, the banks are too big to fail which allows them to commit funds they would not otherwise commit, and there has been no overall liquidation of speculative positions. The result is that banks have been able to manipulate prices, and pricing has become distorted, confirmed by emigration of gold away from derivative markets.

The third condition cited above needs further explanation. Since March speculative longs have been liquidated through stop-loss orders, leaving a core of longs inaccurately regarded as speculators. The banks have closed their short positions by encouraging new speculators to open short positions, so the speculators are all now on the short side. They don’t realise it yet, but the speculator shorts are the now only true speculators in the market. Therefore when they come to close their positions, there is no one to provide them the necessary market liquidity except on a completely different and higher price basis.

The net effect on the gold price so far has been to suppress it. Demand for physical has increased at lower prices as one would expect, leading to a physical liquidity crisis on US futures markets. At the same time a parallel liquidity crisis has developed on the London Bullion Market, evidenced by negative gold forward rates.

It has the makings of a perfect storm.

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Tonight, the Comex registered or dealer inventory of gold falls again and this time, well below the 1 million oz mark at 939.501 million oz or 29.22 tonnes. This is dangerously low especially when we are now into the August delivery month. The total of all gold at the comex (dealer and customer) rises slightly tonight but still well below the 7 million oz barrier resting at 6.991 million oz or 217.46 tonnes.

JPMorgan's customer inventory remains constant tonight at only 46,069.447 oz or 1.43 tonnes. It's dealer inventory rests at 390,092.326 oz (12.13 tonnes) but it still must settle upon contracts issued in the May and June delivery month which far exceeds its inventory. (see (i) last Wednesday's Bill Kaye interview with Lars Schall on the lack of deliveries at the comex per outstanding issuances and (ii) Alasdair Macleod yesterday with Max Keiser).
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... The move toward backwardation in the GOFO rates is significant in my mind because it is occurring at the same time that COMEX stands to lose roughly 60% of their registered Gold. If no more Gold enters the dealer side between now and Dec. we will have a disastrous "cash settlement" which of course will not be called a default… but in reality and practicality "default" it will be.

December currently has contracts open representing 22 million Gold ounces while the registered Gold is only 700,000 ounces. Once October is finished there will be only 300,000 ounces remaining unless the inventory is replenished. (Please keep in mind that JP Morgan has had exactly ZERO outside ounces delivered in since Jan. 1st). This is a default in the making! What has been done time after time looks to be happening again, supply has tightened up …and yes, exactly at the same time that "price" has been pushed down. This economically makes no sense whatsoever from a supply and demand standpoint. If actual Gold was being sold supply would be plentiful and there would be no pressure for GOFO rates to go negative. Friday’s dump in price was clearly new short selling as the open interest rose over 7,000 contracts or 700,000 ounces. Who has this amount of metal to either sell or sell short? The answer is NO ONE!
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Your Wed-Thu totals are: ... GLD "inventory" down 6.9 mts or about 222,000 ounces.

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Your Wed-Thu Comex Vault totals are: An increase of 197,307 ounces, all in the eligible category.

Putting it together, I have no remaining doubts. "Quod Erat Demonstrandum".

The bullion banks are desperate for gold to settle in both London and New York. We see it in the declining Comex stocks and the occasional London Forward Rate backwardation. In order to settle their current obligations and replenish their vaults for future delivery requirements, the bullion banks now regularly orchestrate predictable raids on paper price in order to create the selling conditions which give them cover to raid the "inventory" of the GLD for their own use.
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PMBug said:

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[GLD]May 6.2013:
Tonnes 1,062.30 - Ounces 34,153,900.65 - Value US $50.153 billion

May 3.2013:
Tonnes 1,065.61 - Ounces 34,260,271.68 - Value US $50.311 billion

May 2.2013:
Tonnes 1,069.21 - Ounces 34,376,316.61 - Value US $50.482 billion
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http://harveyorgan.blogspot.com/2013/05/gold-continues-to-leave-comexonly-57.html

The "vacuum cleaners" are still sucking away.

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Oct 18:
Tonnes 882.23 - Ounces 28,364,468.08 - Value US $37.333 billion

Oct 17:
Tonnes 882.23 - Ounces 28,364,468.08 - Value US $37,411 billion

Oct 16:
Tonnes 885.53 - Ounces 28,470,642.88 - Value US $36,249 billion
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Robust Asian demand for physical gold continues in complete contrast to liquidation by Western investors over the past two years. Shanghai premiums vs. London spot were up to 7% this year. Below is a chart of year to date Chinese imports vs. liquidation of ETFs:

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In a little more than a half a year, the silver stocks at the Shanghai warehouses have declined 692 tonnes or 62% of their total before the April 12th silver & gold price take-down. It is quite interesting that the silver inventories in Shanghai continue to decline, even though at a slower pace in the past month, while the Comex silver levels remain about the same as they were in April.

Lastly, there are some very interesting trends taking place with U.S. scrap silver exports that I will discuss in a later article. Let’s just say, silver scrap from the United States is showing some significant changes in the amount and type that is being exported.
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PMBug said:

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From Friday:

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Oct 18:
Tonnes 882.23 - Ounces 28,364,468.08 - Value US $37.333 billion

Oct 17:
Tonnes 882.23 - Ounces 28,364,468.08 - Value US $37,411 billion

Oct 16:
Tonnes 885.53 - Ounces 28,470,642.88 - Value US $36,249 billion
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... kilo bars are primarily a size in demand in the India/Asian region rather than the US, and most of the bars in COMEX I guess would be 100oz. I note that the rulebook specifies a minimum of 99.5% purity whereas kilo bars for the Asian market are generally demanded to 99.99% purity. As it costs more to make 99.99 than 99.5, a bullion bank isn't going to put 99.99 kilo bars into COMEX and may not be able to use 99.5 COMEX bars to meet Asian demand without re-refining. So we sort of have two separate kilobar markets.

The end result of the above facts is that kilo bars in COMEX I guess would rare. Therefore, TF was on to something when he saw kilo bar movements into COMEX, the problem is he got the analysis completely backwards.

If Asian demand is high and a bullion bank can get good premiums on 99.99 kilobars, they are going to ask refiners to turn all mine dore into 99.99 kilo bars. So if we see 99.5 bars going into COMEX then it may be an indicator that Asian demand has eased. Maybe JPM had commitments with refiners to buy their output for a period of time, and if Asian demand had eased then they may have just asked their refineries to make 99.5 (for all we know maybe those deliveries were 99.99 kilo bars) and they are just parking them in their COMEX warehouse, waiting for Asian demand to return.

This Tuesday report from Reuters confirms the theory: Asia Gold-Chinese prices at a discount on credit crunch fears:

"'The rise in borrowing costs in onshore China plays a crucial role. People don't want to keep the metal and they try to dump it to raise cash,' said one precious metals trader in Hong Kong. Another trader said there had not been a significant drop in demand but liquidation of stocks was taking its toll on prices."

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... keep an eye on the CME reports - if there are movements of round ounce tonne lots, indicative of kilo bars, out of the warehouses then it may be an advance bullish signal of Asian demand returning.
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November 1: after a 4 day hiatus, gold lost a monstrous 5.7 tonnes ...

Tonnes 866.32 - Ounces 27,852,949.60 - Value US$36,382 billion
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Last week was turning out to be the quietest week in months in terms of COMEX gold inventories, until we had a large registered gold transfer that was reported late on Friday. This transfer took COMEX gold registered stocks to a new all-time low at just above 650,000 total registered gold ounces.
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Total COMEX gold stocks only declined by a minute 499 ounces for the week, which was the quietest week we've seen in quite some time. But the week was marked by a large late week transfer of 48,652 gold ounces from registered gold inventory (deliverable) to eligible gold inventory (non-deliverable). This took total COMEX registered gold stocks to a new all-time low, falling past the previous low of 665,243 ounces seen in early September.

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 investors can see, after declining a bit, owners-per-registered ounce advanced to 55 owners-per-registered ounce - which leaves us near historic record highs. In fact, before this year we've never seen above 40 owners-per-registered ounce - even during the spike in gold in 2011.
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Additionally, we're seeing more and more owners per registered ounce in terms of the COMEX paper trading - if a mere 2% of outstanding contracts were held until delivery, there simply wouldn't be enough gold to cover it at current registered gold levels.
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Last week was another quiet week in terms of the number of physical gold transaction on the COMEX, which was very similar to the previous week. But on Thursday we saw one of the largest transactions in weeks as over 50,000 ounces of registered gold from the HSBC warehouse was transferred from registered to eligible status. This took COMEX registered gold inventories to a new all-time low at under 600,000 ounces.
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The drop in registered gold inventories resulted in a new all-time high in owners-per-registered ounce, as the ratio soared to over 68.5 owners per registered gold ounce. Let us take a step back and understand what this means - it means that if only 1 contract out of every 68 contracts on the COMEX asked for delivery, there will not be enough gold to cover the delivery requirements. To see how abnormal this is, all one has to do is look at that last chart in the image above and see the unprecedented and parabolic rise in the "Number of Owners Per Ounce." As we always advise investors, whenever you see a parabola in anything financial, it usually precedes a major event. We believe something is coming - we just don't know what and when.
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Last week ended with COMEX gold inventories hovering near all-time lows after seeing slight gains in registered gold ounces, though in eligible gold ounces the weekly gain was of a decent size. As we get closer to December, which is the month that traditionally has the most deliveries, it may get rather interesting with registered inventories at such historically low levels.

Another interesting thing to take note of is that COMEX open interest (the number of gold contracts outstanding) has been creeping up, from 40.2 million contracted ounces to 40.8 million ounces over the past week. This is something quite interesting ...

As investors can see, last week saw a decent size rise in total COMEX gold inventories as 33,271 ounces were added to COMEX warehouses - which makes this the seventh week in a row that gold has been added to COMEX eligible inventories. Registered gold inventories also saw an increase, but it was a mere 2,180 ounces, which makes it a tiny change and the smallest weekly move in registered gold over the past two months.

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Even though registered gold inventories increased slightly over the past week, investors will notice that the owners-per-ounce ratio actually increased during the week to a new all-time high of 69 owners per registered gold ounce. This was primarily due to the increase in outstanding COMEX gold contracts as more traders opened gold contracts during the week.

As we alluded to in our introduction, we've also been seeing the open interest increasing in COMEX gold over the last few weeks, as seen in the 6-month chart below.

In layman's speak, an increase in open interest that is paired with declining prices suggests that new short positions are being opened up because traders are opening new contracts at the bid of the gold price rather than the ask.
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ancona said:

With all of this gold purportedly fleeing the GLD warehouse, is there any new stock coming in to replace it? ...

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ancona said:

If GLD sold X quantity of shares, but they release Y ounces of gold from stock to satisfy some big order, or part of a big order, don't they need to replace the gold? ...

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ancona said:

I would think that there is some invisible line on the chart that cannot be crossed if the fund is to remain viable. ...

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Nov 25.2013: we had another huge bleed of 3.3 tonnes of gold. ...

Tonnes 848.91 - Ounces 27,293,229.72 - Value US$33,914 billion
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This week saw a decline in COMEX gold interest as outstanding contract ounces declined from 40.83 million ounces to 38.65 million ounces. But this is hardly surprising as US trading was quite slow for the Thanksgiving holiday and we expect to see an increase again next week as trading picks up. We also note that owners-per-registered-ounce remains extremely high at 65.4, and as the chart above shows, we remain on our parabolic rise in this statistic.

Finally, Indian premiums are again touching highs, and the new Chinese Lunar year approaches. Could major traders be trying to depress the price before December deliveries? We would not be surprised.
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rblong2us said:

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and in the comments theres a few knowledgable folk .........

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