LAWRIE WILLIAMS: The COMEX gold warehousing debate - the truth

We have seen articles suggesting that COMEX gold warehouse gold stocks are low to the point of serious concern in the ability to provide physical gold on contracts which demand it.  There was an immediate response from other analysts – some rather more aimed at the individuals suggesting that the COMEX stocks might be at a critical level – in refuting the claims, but who is right.  Unfortunately the answer is both sides are at least correct in part, but one side – the accused ‘crazies’ - are at least dealing in fact, while the other, being the mainstream, in what is a partial truth.


The original article on which the furore was based came, as far as I can ascertain, from Bill Holter, writing on Jim Sinclair’s JS Mineset website.  Bill noted: “One other area to look at before we get back to the Fed is the COMEX gold circus. Registered gold available for delivery by dealers has dropped significantly because of last month’s deliveries http://www.zerohedge.com/news/2015-09-09/something-just-snapped-comex

The total is now about seven tons left (JP Morgan has less than 1 ton) which leaves total contracts divided by deliverable gold at the crazy multiple of 207 potential claims for every deliverable ounce.
“This is beyond dangerous and now means a paltry $250 million is enough to clean out the vaults! I have said for about two years, “force majeure” would be the end game and it certainly looks more and more likely. To put this in perspective, this amounts to about 6 hours (or less) worth of interest the U.S. must pay on its debt. To point out the obvious, you probably sleep more hours each day than this! “


Now Holter’s views are always entertaining, sometimes very prescient, and occasionally ‘off the wall’.  But here he is drawing on the factual position of COMEX ‘registered’ gold stocks – which are stocks held in COMEX warehouses and which are immediately available against contracts requiring delivery of physical gold.
See below the latest chart from Nick Laird’s www.sharelynx.com site detailing the COMEX registered gold position – and which demonstrates Holter’s concerns:


Those refuting Holter’s concerns point to the other category of COMEX warehoused gold – the ‘Eligible’ stocks which are at a hugely higher level and far more than sufficient to cover any likely demand for physical gold out of the warehouses for years to come.  But this is not comparing ‘apples with apples’.  Gold in the ‘Eligible’ category will include gold held by gold refiners, investors, fabricators, producers or by the bullion banks on behalf of clients.  A good explanation of how the system works can be seen by accessing a 2013 article on bullionvault.com: https://www.bullionvault.com/gold-news/comex-gold-stocks-072420136


As this article points out: “Eligible gold stocks may or may not ever become registered stocks. Why? Because the warehouse is still a warehouse and the owner may simply want to vault their metal securely, before using it to meet demand elsewhere – for manufacturing, or from investors in another marketplace, such as Asia. This eligible gold may belong to an investor, a refiner, a hedge fund, a bank or producer. Many times these people are holding the metal for their end customers. And it may move at any time, and is much more flexible than the warehouse receipts that are registered stocks.”


What this means is that although ‘Eligible’ stocks may be many times bigger than ‘Registered ‘ stocks all this means is that they are held in COMEX warehouses and meet COMEX standards and specifications.  They may thus not necessarily be available for transfer to the ‘Registered’ category as they may belong to third parties who are using the warehouses for storage, not for trade.  This fact has been glossed over by those refuting Holter’s opinions that the situation is ‘beyond dangerous’.  What is effectively unknown here is exactly what proportion of the ‘Eligible’ stocks is actually available for transfer into the ‘Registered’ category at short notice to meet immediate demand.  Given that physical deliveries out of COMEX are actually pretty small – Jeff Christian of CPM Group has apparently recently told Bloomberg: "Our clients will call up saying 'I hear the COMEX is running out of gold, what do you make of it?' and our quick answer is that this is a non-issue.  Even if you look at the fact that registered stocks have declined, the fact of the matter is most COMEX ‘futures contracts’ are cash-settled and traders don't take delivery of the metal.”


What is apparent though from the figures showing the rundown of COMEX ‘Registered’ stocks is that physical gold is indeed flowing out – mostly to Europe for re-refining into smaller sizes and then shipped to the big markets in Asia and the Middle East which are absorbing huge quantities of gold.  Certainly the gold in the ‘Registered’ category can be supplemented by metal from the ‘Eligible’ category – as has been seen recently with big transfers from the JP Morgan vaults – so a default position is unlikely to be attained.  But no-one seems to be able to say for sure what proportion of the ‘Eligible’ stock position is truly available to be thus moved.


So yes, there is truth in both arguments relating to the COMEX stock position.  Perhaps this is something that may be able to be cleared up by Jeff Christian in his keynote presentation at the Denver Gold Forum next week.  We shall see.

 

 

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18 Sep 2015

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com