Jan 062016

Focusing on registered stocks versus open interest is a favourite of many bloggers because it produces dramatic “Comex is about to fail” figures. I have written many times that one also needs to consider eligible stocks as eligible inventory can be converted to registered relatively quickly. Blogger Kid Dynamite noted in passing in an email that December was a textbook example of eligible being used by issuers to make deliveries to stoppers. Not one to take the words of a cartel apologist at face value, I contacted data wrangler Nick Laird for detailed Comex warehouse movements and issuer/stopper figures, to check the facts for myself (and you).

To set the scene, at the beginning of December total registered stocks in all Comex warehouses was 120,967.246 ounces of gold. In retrospect, we know that the total number of contracts that stood for delivery during December was 2033, or approximately 203,300 ounces. Since that number is larger than the total registered stocks, you may be surprised why you didn’t hear about the default of Comex. The reason is that gold was either deposited directly into registered stocks in a Comex warehouse or gold was transferred from eligible to registered.

The table below shows all the changes in registered and eligible stocks per day per warehouse. Note that every single registered change during December was positive. I have coloured them by whether they were directly deposited (yellow), a transfer from eligible to registered (gold), or unknown (blue). In the case of the unknown, these are most likely transfers in my opinion but it is hard to be clear about that as the eligible change is including other movements.


Note that the total increase in registered during December was 154,947.693 ounces – 76% of the contracts standing for delivery – and that 105,086.452 ounce were clearly eligible to registered transfers, given the exact ounces involved. However, what is interesting is how these deposits into registered stocks match up with contracts “issued”, which are listed in the table below.


In this table I have multiplied out the number of contracts by 100 to show them as ounces (and also combined customer and house so the table is easier to read). You will note that the numbers coloured match the amounts being delivered into registered on the same day. For example, on the 15th HSBC issued 223 contracts (22,300 ounces worth) and in the warehouse movements figures we can see a transfer from eligible to registered on the 15th of 22,301.706 ounces.

The warehouse movement ounces of course generally will not match exactly with number of contracts as 100oz bars are usually odd weight where the bar’s weight varies between each bar within a specified tolerance, or where three kilobars are being delivered (which while being exact weight, are 32.15oz each so will rare exactly equal multiples of 100oz, see here for more info). Nevertheless, the repeated movement from eligible to registered matching issued amounts on the same day is proof that eligible stocks can be drawn upon by shorts to meet their obligations. Accordingly, solely looking at registered stocks to open interest is not a reliable indicator of the ability of shorts to make delivery.

For Trainspotters Only

In the table below I’ve done two things:

  1. Split Scotia Mocatta’s eligible warehouse movement figure from the first table above into an assumed eligible to registered transfer and the balance into an eligible other.
  2. Divided all ounce warehouse figures by 32.15. If the resulting amount is an integer (highlighted in purple) then it indicates the movement of kilobars.

I think the fact that the “eligible other” figures are kilobars strongly indicates that my blue “unknowns” were all eligible to registered transfers. It is also interesting that Scotia seems to deal a lot in kilobars in smallish quantities, at least during this snapshot on December. JP Morgan dealing in tonnes of kilobars is nothing new for my long-term readers.


Aug 172015

Last week I explained why shortages occur and how they are generally caused by production capacity shortages. Often such shortages of retail coin products are spun by commentators into a shortage of raw gold or silver or a physical-paper disconnect and thus a sure sign that metal prices will rise.

Mike Shedlock, in his very direct style, says that “any time you see articles promoting the difference between physical gold and paper gold you are most likely reading a pile of crap”, referring to the fact that “one can get physical gold near spot rather easily” and giving the example of GoldMoney or BitGold.

Mike’s comments were in response to this article that argued that because “demand for physical metal is very high … yet, the prices of bullion in the futures market have consistently fallen during this entire period. The only possible explanation is manipulation.” Market manipulation is certainly a factor but claiming it is the only possible explanation is taking a limited view of the dynamics involved.

The authors start by claiming that “for four years the price of bullion has been falling in the futures market despite rising demand for possession of the physical metal”. As proof, they mention prior periods of coin shortages. While there have been periods of resurgent demand, the fact is that retail bullion dealers have had a tough time since gold prices peaked and many have scaled back the size of their business. One would not see bullion dealer bankruptcies like Tulving or Bullion Direct in a market with rising demand. I’d argue that scaling back of inventories as demand waned was probably a contributing factor in the recent shortages.

The authors also ignore the rest of the gold market. Certainly Chinese demand has provided a base but Indian demand was affected during the last four years with their Government’s raising of duty levels. We have also lost the demand that came from ETFs, which has swung from a net 1,407 tonnes in the 15 quarters from Q1 2008 to Q3 2011 to minus 712 tonnes in the subsequent 15 quarters, a change of over 2,100 tonnes in the supply/demand balance.

After going over Supply & Demand Curves 101 they then argue that it is “nonsensical” to argue that “the drop in precious metals prices unleashed a surge in global demand for coins” because “price is not a determinant of demand but of quantity demanded. A lower price does not shift the demand curve. Moreover, if demand increases, price goes up, not down.”

This view ignores the feedback nature that price has upon demand. Most certainly price shifts the demand curve – people adjust their personal demand curves over time and price is one input into that. The Perth Mint has a lot of clients who bought gold at around $300 an ounce and I’m sure in 1999 if asked they probably would have agreed they’d sell when it got to $1,000. However, many did not and held on because the trend upwards in the price made them revise their perceptions of what was a fair price.

The authors also assume that gold has a normal demand curve, that is, if price goes up then quantity demanded will go down. However, as Paul Mylchreest asks in this article, maybe gold is a Giffen good, where quantity demanded goes up when the price goes up. Ted Butler makes a similar observation in this article, noting that “managed money technical traders … buying on rising prices and selling on declining prices”. Looking at a graph of retail bar & coin demand as reported by the World Gold Council versus price seems to lend weight to the Giffen good argument.


Apart from two surges, quantity demanded seems to increase, and decrease, with price. If I take the data from the chart above and plot it as price versus quantity demanded, then you get the chart below.


The red line is a line of best fit, and it certainly doesn’t look like the demand curve the authors refer to. This is by no means a proof that gold is a Giffen good, but it certainly points to the fact that gold does not neatly fit into an Economics 101 view of the world and the reality of gold investor behaviour is more complex.

The authors then seek to argue that the only other explanation of a lower price, using Supply & Demand Curves 101 theory, is that supply must have increased. They then claim that “there are no reports of any such supply increasing developments. To the contrary, the lower prices of bullion have been causing reductions in mining output as falling prices make existing operations unprofitable.”

Regarding unprofitability, an analysis of the top mining companies’ financials by Adam Hamilton notes that “the gold-mining industry’s cost structure is far lower than that $1200 number often thrown around … on a cash-cost basis, they could weather an $800-gold anomaly for many quarters”. This may be why GFMS figures show no reduction in mine production, with Q2 2015 tonnage of 786.6 up 3.1% on Q2 2014, with the chart below showing that mine production has been rising all during the “four years the price of bullion has been falling”.


The authors then refer to futures market speculators and manipulations. Certainly, gold’s low liquidity allows for manipulative events, which can affect market sentiment in the short term. However this is not enough to supress the price over the long term, or four years, where market fundamentals are the main driver.

Ultimately, the authors’ problem is with speculators, who they see as “selling naked shorts [as] a way to artificially increase the supply of bullion in the futures market where price is determined.” They get so close to the actual nub of the problem but miss it when they say that “if purchasers of these shorts stood for delivery, the Comex would fail.”

The fact is that the longs are as naked as the shorts. Both are using all their available money to fund their margin requirements so as to maximise their leverage, so the shorts don’t have the metal but the long don’t have the money. That is why delivery rates have always been so low on Comex and there is nothing to indicate that this will change. You have gamblers on one side betting the price will go up versus gamblers betting it will go down. If there is any manipulation, one could argue that it is the policy of low interest rates which encourage such excessive speculative behaviour.

The authors conclude that a “rational speculator faced with strong demand for bullion and constrained supply would not short the market” but as I’ve shown above, demand has been weak and supply has been rising. That is not to say that the short speculators are entirely rational continuing with their trade, as many have noted the market is reaching extremes on a number of measures. The nature of markets these days seems to favour trend following rather than fundamentals, which is fine until the trend changes. One thing I can be sure of is that when it does you will not see any article complaining about speculators “buying naked longs”.

Jun 302015

UPDATE 2nd July: Please see this post for a correction to some of the statements I made below, it is unlikely that total precious metal derivatives have declined.

Yes, you heard that right, the US Office of the Comptroller of the Currency’s (OCC) latest quarterly report show a reduction in total precious metal derivatives from $106,293 million to $75,620 million. This is at odds with Zero Hedge’s post first, ask questions later approach where they say that there was a “237% increase in the total amount of precious metals (which include gold) contracts in the quarter”.

Zero Hedge get their percentage from a graph from the report (see below) that does show a big jump. However, if you look more deeply into the Table 9 figures they also featured, it becomes clear that the chart is most likely a mistake.

In the picture below I have drawn lines from the tables to the chart, to show where the chart is getting its figures from. For Q1 2015 you can see with the green lines which Precious Metals figures from Table 9 their chartist has used. Note that in the Q1 2015 report this table refers to the total of gold AND the other precious metals.

For Q4 2014 you can see with the red lines that the chartist has used the figures from the column named “Precious Metals”, mistakenly thinking that because this column has the same name as those from the Q1 table, that the figures refer to the same thing. This is not correct, as the Q4 Table 9’s “Precious Metals” means the other white metals only.

OCC PM Derivatives

A true apples with apples comparison would add up both the gold and precious metals figures (see purple circles) from Q4 2014 . If you do this you get a total precious metal derivative notional amount of $106,293 million for Q4, which declined 29% to $75,620 million in Q1. Such a decline doesn’t make for much of a meme that the OCC is trying to hide a radical increase in gold derivatives.

Indeed, if you take the last twenty years or so of OCC gold derivative figures and eliminate the effect of changing metal prices to convert them into notional tonnes to see what has really been going on in the gold market, you get a chart like the one below.



You may be surprised to see this chart showing a very dramatic decrease in bank gold derivative activity, as the impression most gold commentators give is that gold speculative derivative activity by banks is huge and increasing. A fair part of that decrease is the result of miners reducing their hedging (see here for a comparison of the miner hedge book versus OCC derivatives over time).

It is unfortunate that the OCC has decided to lump gold in with the other precious metals as it means we will no longer be able to estimate the notional tonnage of gold derivatives with any accuracy – yet another blow to transparency in the gold market. But whatever the reason for the change, it certainly isn’t an attempt to hide any massive increase in gold derivatives.

May 182015

I was joking earlier this month when I said “350 million ounces looks like an understatement” with regard to Ted Butler’s theory that JP Morgan is accumulating physical silver. Last week Ted claimed that “the real amount may be in excess of 500 million ounces” but that he uses the 350 million ounce figure because he is worried “heads might explode if the number is closer to half a billion ounces” and he is “not looking for anyone to lose their minds”.

He also ups his belief of how many coins JP Morgan has bought, from 70 million to over 100 million. I didn’t deal with the coin buying claim in my last post, focusing instead on the divergent sales theory behind the 350moz claim, but here I want to address the coin side of the argument.

Ted’s theory is that JP Morgan “is exploiting a loophole in the law that requires the Mint to produce to whatever the demand might be” by manipulating the silver price down then requesting “the US Mint sell it all the Silver Eagles it can produce”. He says that JP Morgan “doesn’t care if it is paying $2 over the spot price, JPM wants all the silver it can get its hands on”. Ted then claims that JP Morgan has those coins melted down into 1,000 ounces bars and as “the coins are the same purity as 1,000 ounces bars, melting is a simple and a low cost process”.

My first response to this is why would JP Morgan buy coins when it can buy silver from anyone in the value chain before the US Mint? There are many businesses involved in getting coins produced, with value being added at each point:

Miner -> Refiner -> Blank Manufacturer -> US Mint -> Distributor -> Retail Investor

Given JP Morgan’s (along with HSBC’s) dominant market share in the precious metal markets, they have trading contacts with many miners, all of the key refineries, as well as blank manufacturers for the US Mint (one of which is The Perth Mint). Why pay the US Mint $2 an ounce when you can offer anyone else in the value chain before it gets to the US Mint much less than that? If they offered to pay, say, a $1 premium to silver producers they probably have every single one of them beating their doors down. Refinery margins are so thin you wouldn’t have to offer much to them to guarantee supply.

As to the “loophole”, while the US Mint has a requirement to meet demand that does not extend to its blank suppliers and nor to refiners or miners further back in the chain. Indeed, the US Mint has had periods where it has not been able to get enough blanks and has had to stop Eagle sales in the past, proof that its suppliers have no obligation to supply them. Ted also claims that JP Morgan buys Silver Maples but the Royal Canadian Mint has no such obligation to sell.

So there is no impediment to JP Morgan simply poaching all the silver supply that flows through the production chain that goes to the US Mint. If JP Morgan is indeed keen for physical silver, it makes no commercial sense to buy coins when they can acquire it much more cheaply from others.

Some may make the argument that these other suppliers would not sell at the manipulated and artificially low silver prices when JP Morgan wants to buy. The fact is, however, that the refiners and blank manufacturers take no price position with their silver and are hedged, so they do not care what the price is when a JP Morgan asks to buy silver – their business model is based on premiums above metal price less cost of manufacture, not on the metal price itself.

Miners you may expect would be more careful when they sold, but the fact is that most are price takers and have to sell as they produce as they need the cash to pay their bills. Miners may withhold a few days production but most cannot finance such long positions for long once the metal is out of the ground. The Perth Mint’s experience, as I’m sure is that of the other key LBMA refineries, is that mine supply into a refinery is fairly consistent. The evidence from the London Auctions is that miners are price takers.

Also, it would not be as cheap as Ted thinks for JP Morgan to have bought massive numbers of monster boxes (100moz = 200,000 boxes!) which would then need to be unpacked (and boxes disposed of) and the coins melted down by refineries. Nor would it be able to be done without one word leaking out to the wider professional market about what JP Morgan are up to and them then being front run by their bullion bank competitors. We have not heard one word of this massive logistic and operational exercise – it would be impossible for it to be completely hidden given all the staff involved at US Mint distributors, secure carrier firms and the refineries themselves.

Finally, do you think that a refinery getting thousands of monster boxes would not think it a bit unusual for them to be supplying blank manufacturers with silver which is then coined and then returns back to the same refinery for melting, and it would not prompt them to suggest to JP Morgan that it would be a lot less work and cost to JP Morgan to just buy the silver from them in the first place?

In addition, as to the Maple leaf buying, since the Royal Canadian Mint is a combined refiner, blanker and mint (like The Perth Mint) and the only refinery in Canada with the scale to melt down coins in such volume, is Ted saying that JP Morgan buys coins from the Mint then asks them to melt them back down? Wouldn’t the Mint just see the advantage to themselves to suggest they supply JP Morgan with 1000oz silver bars at a premium? Or is Ted suggesting that JP Morgan buys Maples and then ships them to Salt Lake City to the ex-JM refinery in the US or elsewhere at more cost just to have them melted down, and buys Eagles in the US and ships them to Canada (the nearest non-US refinery of scale) to be melted? If so, to what purpose? To hide their strategy from the Royal Canadian Mint and US Mint?

The whole theory is nonsense. I’ll leave it up to you to read my theory and Ted’s and make up your mind as to who exactly has “lost their mind”.