Last month I covered Comex warehouse stocks in response to “a lot of chatter about the potential or certainty of failed settlement and Comex default”, making a number of points:
- inventory can be converted from eligible to registered relatively quickly
- including eligible inventory give a very different picture of warehouse stocks and owners per ounce
- the actual percentage that stand for delivery is only 2-4%
- current registered stocks vs open interest is well within current delivery rates
For those who focused on the registered stocks only, recent Comex deliveries have caused some disbelief. The best example of this is this piece by Zero Hedge. They way they word some statements could be misconstrued by investors new to precious metal, so as an education service below are some quotes from the article and some clarifications.
“the most recent drop in Comex registered gold”
When you see articles referring to “Comex” this or that, the writer is just using that as a shorthand for “client owned metal stored in independently run vaults licensed/recognised by CME Group”. Comex/CME Group does not own or operate any vaults or own any metal itself.
This sort of shorthand you will also see used in respect of “LBMA” or the London Bullion Market Association. The LBMA is just a trade association and does not operate vaults or own metal.
“the Comex once again succeeded in sweeping default fears under the rug by boosting its eligible gold by a whopping 78% overnight”
As per the above point about shorthand use of “Comex”, please do not read this as Zero Hedge saying that the CME Group owned eligible gold and transferred it to registered. What they are referring to is the fact that clients who were holding short contracts would have instructed the warehouse where their metal was stored to move it to registered (or warrant it). This is an electronic process and as the metal is eligible (ie meets delivery requirements), no further verification etc of the physical bars is required, it is just a computer entry.
The reference to whopping I do think is overstated. That 281,000 ounces is not a lot when you look back historically. The chart below goes back 5 years and I’ve circled Zero Hedge’s “whopping” in red.
As you can see with my purple circles, there have been many times that registered stock has increased dramatically and by much more than 281,000 ounces, and in a number of cases, these have occurred not from transfers from eligible stocks but from shipments directly into the warehouses. Hence why I made the point last month that one is bound to get disappointed if one just focuses on registered stocks.
“thanks to JPM reclassifying 276K ounces of gold from the Eligible into the Registered category”
Again, please note that Zero Hedge is not saying that JP Morgan themselves just decided to reclassify gold, as it is the client who owns the metal that has control over that decision. Note that some warehouse operators also trade on Comex for their own account. In this case it could be that JP Morgan may have done the reclassification (or more correctly, the trading desk of JP Morgan instructing the warehouse division of JP Morgan) but we cannot deduce this solely from that Comex report.
“even as actual eligible gold continues quietly hemmorhaging out of the Comex”
I’m a bit puzzled by this “hemmorhaging” as you can see from this chart of total eligible gold held with Comex licensed warehouses below.
While the 1 million or so that has moved out of eligible over the past few weeks is about 10% of the total, it is not a big drop when you look at the big picture: apart from a bump post financial crisis and drop off after gold fell from its peak, it looks to me that Comex warehouse operators have been growing their storage business quite successfully.
“will JPM be as eager to continue “adjusting” eligible gold into registered if the recent trend in gold redemptions not just in its vault, but across all Comex gold warehouses continues”
Again, Zero Hedge here are in shorthand referring to JP Morgan’s customers doing the “adjusting”. What is meant by “all warehouses” is that a client of a futures broker who is short is not limited to tendering metal in a specific warehouse, or a warehouse associated with that broker if the broker also operates a vault. Customers may have metal in any or multiple warehouses and can choose any such warranted metal to make delivery with.
If you are new to precious metal markets, hopefully the above has been of use, otherwise you may have come to the conclusion from reading that article that the CME and/or warehouse operators somehow had some responsibility to make delivery of metal to rescue Comex from default, which to anyone with a basic understanding of how futures markets operates, would be a very silly thing to think.