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.


Dec 152015

Last week I wrote about the gold warehouses associated with the CME’s kilo futures contract. Today I’ll have look at the Comex New York warehouses but rather than focusing on the eligible/registered debate, which has been done to death, I want to look at the fight between the warehouses for storage customers and the entrance of JP Morgan into this $30 million per annum business in early 2011 (hence my tacky topical title).

The stacked area chart below shows Comex gold stocks by warehouse. It shows the build up from 3 million ounces to nearly 12 million ounces during gold bull market and then a fall, similar to what we have seen with ETF stocks. The point marked (1) is the entrance of JP Morgan into the vaulting business in March 2011 and their impact on the other two major warehousers, HSBC and Scotia.


A better sense of the impact of JP Morgan’s entrance into this business can be seen in a percentage stacked area chart, see below.


Before JP Morgan’s arrival, HSBC and Scotia had over 90% of the market but this chart shows clearly that JP Morgan quickly cut HSBC’s market share from 50% to 35% and also into Scotia’s as well. During 2013 HSBC fought back and regained market share, initially from JP Morgan but then in 2015 eating into Scotia’s business.

The storage market dynamics are a bit difference in silver, with total silver stocks being somewhat consistent around 100 to 120 million ounces during the bull market and in contrast to gold, showing a ramp up to 180 million ounces as silver has fallen.


The storage business is also more competitive, with Brink’s and Delaware having larger roles and market share being spread out. Again we see the impact of JP Morgan, although it took until mid 2012 before they gained business. CNT also entered the market in late 2012.


From a market share point of view, it would appear that JP Morgan and CNT together have mostly taken business away from HSBC and Scotia and been able to maintain it.

While both the gold and silver warehousing market seems quite dynamic and competitive, it is interesting that the players don’t compete on price, with all of them charging according to CME $15 per 100oz gold contract per month and $8.50 per 1000oz silver bar per month (excepting CNT, who charges $6.75). At current metal prices that $15 fee equates to 0.17% per annum and for silver the rates are around 0.75%.

In addition, those fees also have not changed at least since June 2014, which is as far back as the Wayback Machine recorded the fee file. No one charges a Delivery In fee (which makes sense, you don’t want to dissuade people from putting metal in), but Delivery Out fees do vary, indicating some competition for those clients who do use Comex to source physical.

The lack of price competition is unusual in what is not an insignificant market. The table below shows the total estimated storage fees earned from 2011 to today.


Given that vaulting has large fixed costs, every additional ounces stored generally represents clear profit – the marginal cost of additional ounces stored is close to zero. With that set up one would expect more jockeying on storage fees.

The big loser in the warehouse wars has been Scotia, who had 32% of the $30 million per year storage revenue on offer during 2011, falling to 14% in 2015 ($4 million worth). The winners were CNT which moved from zero to 8% and JP Morgan who currently sit at 24%, equivalent to $7 million.

Dec 112015

Back in July I pondered what happened to 110 tonnes of gold in one of the Hong Kong gold warehouses registered by CME for its kilo futures contract. The chart below updates the figures and shows that wherever the gold went, its is gone for good.


Note that the straight line marked (1) is just an extrapolation between the last figure reported in the CME’s submission and the first figure reported on CME’s warehouse stocks report (see previous post for an explanation) and is not reflective of the actual movements during this “blackout” period.

The Malca-Amit warehouse dropped down to one tonne when the contract started trading and has only increased to 1.148 tonnes since. The Loomis warehouse I haven’t shown as there was no history reported by CME and it is only held around half a tonne since it came online mid this year.

All the action in Hong Kong is in the Brink’s warehouse, which appears to average 1 million ounces (or 31,103 kg). However, this has no relation to the volume that is being put through the CME kilobar contract.


As the chart above shows, the average daily volume is about 300 contracts and open interest at say 30 contracts (30 kg). In terms of an Owners per Ounce metric the contract is running at 0.001, or to put it another way, there is 1 tonne of gold “backing” each contract. Those that get worked up about Comex “leverage” ratios should be interested in the fact that the Hong Kong warehouse report only shows eligible stocks and has never shown any registered, which probably has something to do with the fact that the delivery notice report shows no issues/stops for the kilo contract so far this year. Forget your 300:1 Comex “leverage” – that would put the OI/Registered Stocks ratio as divide by zero error, or in other words, the CME’s Hong Kong contract has infinite leverage!

While the CME Hong Kong kilo contract is basically dead (even though they have 12 firms on their Market Maker Program), the Brink’s warehouse is far from morbid. This chart from Nick at Sharelynx shows that there has been over 840 tonnes of gold withdrawn (and pretty much that much received in) since the futures contract started trading.


Obviously this activity has nothing to do with the kilo contract and must be related to other over-the-counter (OTC) trading. For example, company A has gold with Brink’s and does a private sale to company B, the trade is settled between the two banks by their settlement departments, and then company B then instructs Brink’s to ship it out, at which point Brink’s reports that to CME as a withdrawal. These movements are only now visible to the market because the gold in the Brink’s warehouse is in the form of kilobars, which are eligible for the contract, and therefore have to be reported even if they have nothing to do with futures trading.

So even though the CME kilo contract doesn’t seem to be getting any traction, we can at least thank them for doing it because it now gives us visibility into the Hong Kong gold trade. One part of that trade that can be shown from the warehouse stocks data is the inventory build up prior to the Chinese New Year. The chart below shows the warehouse stocks in Brink’s leading up to Chinese New Year, indexed to 100 so they are easily comparable between each year.


The data is a bit chunky as CME only reported monthly average historical stocks in its submission, but it is clear that there is generally an inventory build two to three months before the new year. So far for this year, leading to the 2016 new year, we see the stock build up and now it is being worked down as metal gets delivered to jewellery firms for production into finished pieces.

Just one final observation. As per CME storage fees note, Brink’s charges $6.50 per contract per month, which works out at around 0.22% per annum storage rate. Malca-Amit only charges 46% less at $3.50 a month, but that hasn’t got them any business. By my estimation, Brink’s has earned over $13 million in storage fees since January 2011, and $2.3 million so far for 2015 – a lot of money Malca-Amit and Loomis are missing out on.

Nov 262015

Today the Perth Mint and Australian Securities Exchange (ASX), one of the world’s top-10 listed exchange groups measured by market capitalisation, announced that they would be collaborating on developing new exchange traded precious metals products.

The first product is mostly likely to be a gold futures contract deliverable in Perth. Given the focus the gold community has on futures markets, and Comex in particular, I’m sure there will be a lot of interest is this Aussie gold contract. As we are in the process of talking to the market about what features they would like, it is not possible to get into contract specifications at this time but I can make some general comments about the approach ASX and Perth Mint will be taking.

Firstly, the Perth Mint’s role will be solely on supporting the physical delivery part of the contract – we are not issuing the contract or market making on it. ASX will list the contract and market it to their customers in Australia and Asia and traders worldwide.

While this contract will trade 24 hours a day on ASX’s globally connected network, given Australia is the second largest gold producer in the world and that the Perth Mint refines between 300 to 400 tonnes per year, we are sure that there will be a lot of interest in this contract from the physical traders in the Asian region.

The integrated nature of the Mint’s operations also means that unlike other futures contracts, which only offer warehousing, we will be able to offer shorts and longs flexible physical delivery choices that take advantage of the Mint’s refining and manufacturing capabilities.

The Perth Mint’s Western Australian government guarantee will also give comfort to longs who want to stand for physical delivery and store gold with us. In addition, the fact that ASX backs its clearing with its own capital (which is not something all exchanges offer) will reduce counterparty and systemic risk.

The combination of the Perth Mint’s strength in the physical market and ASX’s vertical integration of trading, clearing and settlement will introduce some real competition into the gold futures space. For more information see the official media release here.

Oct 052015

On Friday there was a big move in precious metals, with gold up $25 to around $1135 and silver up $0.70 to around $15.20. In percentage terms the silver move was much more dramatic, approximately 4.8% compared to gold’s 2.3%. The move was in reaction to US non-farm payroll numbers, but in this recent post, Keith Weiner at Monetary Metals goes behind the headline grabbing move and looks a little deeper into what it tells us about scarcity in the silver market.

Keith focuses on the difference between spot and futures prices to get an insight into the hoarding or dishoarding of gold and silver, which he sees as more useful than conventional supply/demand analysis given the large stocks of gold and silver relative to their flow.

Metal is hoarded, or carried, if there is a profit to be had buying metal and selling it later in the future. This occurs when future prices are higher than spot (today) prices and is called contango – the measure of this is the basis.

If metal is scarce then people will bid up the spot price above future prices and this will create an incentive for gold owners to dishoard or decarry, as there is a profit to be had selling metal now and agreeing to buy it back later in the future. This situation is called backwardation and Keith’s measure of it is the cobasis.

The interesting thing about the increase in the silver price on Friday was, Keith notes, that “the cobasis (i.e. scarcity) fell. A lot. In fact, it is the biggest drop in the silver cobasis in years” falling from a profit of 2.9 cents to 1 cent. “Speculators bid up the price of futures so fiercely and so aggressively, that the spread between December and spot was compressed to about 1/3 its previous size.”

To put this move in pictures, I’ve stylised the market situation on Thursday according to Keith below (I don’t have his exact figures, but this chart has the relativities about right and I’ve assumed a bid/offer spread of 5 cents for simplicity).


Note that if you are looking to hoard/carry then you have to buy at the spot offer price and sell at the future’s bid price. If you want to dishoard/decarry then you are selling at spot bid and buying at future offer. Keith says there was a 3 cent profit to be had on Thursday for decarrying, which is represented on the chart up the upward sloping red arrow.

Now consider the situation on Friday.


The way I’ve charted this, by not putting Thursday and Friday on the same chart and using the same 15 cent y-axis scale, emphasises the change in the cobasis rather than the change in price. You can see that the red line is now nearly flat, indicating the compression in profit to be had from dishoarding.

The most interesting aspect of Keith’s post, however, is his discussion about the high silver coin premiums. Keith says that the premiums are not just an indicator of demand for silver coins but also reflects the fact that “the capacity to produce silver coins is inelastic. Manufacturers can only stamp them out so fast” and compares it to “like pulling liquid from a large pool through a thin straw. Yes, it’s drawing liquid out of the pool. But the straw can only flow so much.”

Keith then goes on to compare his cobasis indicator of wholesale market shortage with the coin shortage indicator (ie coin premiums):

His conclusion is that “the same market forces that are driving silver into scarcity can also drive coin stackers, but it does not work so well the other way. Stackers can’t pull enough silver through that thin straw, to cause any serious scarcity in the bullion market. Though they can exacerbate scarcity if it’s already rising”. Not surprising given silver bar and coin demand is only around 20% of global silver demand, although this chart from The Silver Institute would indicate that investors seem to be the marginal swing factor.

Sep 302015

Chris Powell of GATA took exception to my comments about the financialisation of the gold market in my post on Friday, saying that “the more that markets are ‘financialized,’ the more advantage passes to those with the greater access to financing”. I would argue that increasing financialisation increases the advantage of the average investor.

I was using the term “financialisation” in the sense of increasing use of financial instruments, like futures or ETFs. These products are another method by which investors can get exposure to gold, rather than traditional methods like buying gold over the counter and storing it at home. They are popular and have come to dominate over buy-and-hold because they reduce the cost of buying and selling and make it easier to transact. Do they introduce new risks, like exposure to promises of the parties at the other end of the contract? Yes, but then storing gold yourself is not riskless either.

Making it easier to buy, and yes, sell, gold does not give more advantage to the rich. If there were no futures markets the rich would have no problem contacting their private bankers and arranging to put $10 down and borrow the rest to control $100 worth of gold. If “only cash-on-the-barrelhead trading in gold [was] allowed” it would just limit leveraged buying (using borrowed money) and leveraged selling (using borrowed gold) to the professional players. The only advantage that would be “evaporated” would be that of the average retail investor, who would not have that ability in such a world.

Public futures markets, contracts for difference, FX platforms and so on provide easy access for retail investors to magnify their $10 into $100 of buying power. Given that retail investors have been observed to generally prefer long positions and not be comfortable shorting markets, it could be argued that increasing financialisation has been net positive for the gold market. Note also that ETFs opened up the gold market to funds who were restricted from holding physical gold by their terms.

Do such financial products make it easier to short markets? Yes, but that was always easy for the rich and professionals to do. I would also note the comment here that “numerous studies … agree that short selling is beneficial” and that “short-selling bans not only fail to achieve their intended aims, they also have adverse impacts on all market participants: reducing liquidity and increasing volatility”.

Financial gold products are just alternative tools for investing in gold. If a carpenter produces bad work, do we accept that the tools are to blame? Financial products make it easy to buy, or sell, gold. If market participants, including those with the ability to “create infinite money for futures trading purposes” as GATA claims, choose to sell gold then is that a problem with the financial tool, or the user of that tool?

I suggest the answer is to advocate, as GATA does, for transparency regarding public policy in respect of the gold market. As the BIS says, central bank autonomy requires clear objectives, balanced by transparency and accountability.

Aug 212015

Techniques for analysing and trading equities, looking at price and volume, can be applied to precious metal futures markets. Futures, however, introduce another data point – open interest – that has to be considered. With equities, the quantity of shares on issue is generally fixed and rarely changes. Therefore all buying is done from sellers who hold the shares.

With futures, the amount of contracts “on issue” or “open” changes daily, as a future is a contract to trade metal in the future and an exchange will create, or open, as many new contacts as people wish to enter into. If a seller of metal and buyer of metal want to enter into a contract, then a new contract will be opened. If an existing seller of a contact (a “short”) and an existing buyer of a contact (a “long”) want to exit their contract, then the contact will be closed.

Open interest represents the number of contacts created and in existence at a point in time. The table below summarises how open interest will change, depending upon who is buying and who is selling.


In the cases where open interest doesn’t change – that is, an existing long or short is being taken on by a new participant – there may be some information value in knowing who is closing and who is new/adding. This can be done by looking at the changes in the long and shorts held by the various categories on the Commitment of Traders report (material for another post).

It should be noted that a change in open interest indicates very little in and of itself as the opening or closing of a contact requires both a buyer (long) and seller (short). However, looking at changes in open interest in combination with changes in price may give an indication of market strength, as summarised in the table below (see Wikipedia).


Note that increasing open interest can be associated with strong or weak markets. The logic is that if the price is rising and open interest is increasing, then buyers are having to increase their price to induce new sellers into the market. If the price is falling and open interest is decreasing, then longs are having to decrease their selling price to induce shorts to cover and exit the market. The table above can be represented graphically in the stylised chart below showing a rising and falling price with a rising and falling level of open interest.


While this chart demonstrates the highly theoretical nature of the price/open interest trading rule, there is some value in including open interest in your market analysis, as demonstrated in the chart below of the gold price during July 2015.


The light blue lines show the price falling while open interest was increasing, and indeed the market was weak, subsequently breaking through the $1140 support level. The light red lines show open interest decreasing while the price continued to fall and subsequently the market bottomed. Note that the chart also shows violations of the “rules”, so it is not fool proof.

The chart above also includes volume. While volume and open interest are related (they have a simple correlation of 0.81 over 40 years) they do not always move together, so one has to consider changes in both. Keep in mind that, everything else being the same, increases and decreases in open interest will both increase volume.

There are various technical indicators that combine price, volume and open interest, such as the Futures Volume Open Interest (FVOI) Indicator (a variation of On Balance Volume), which Sharelynx calculates and maintains charts for.

For those coming from equity investing, it is important when analysing futures data to remember that the precious metal markets are global and significant volumes are traded in the opaque over-the-counter (OTC) market. While Comex, and increasingly the SGE, have a significant impact on prices, they are not self-contained markets like those for the shares of a company.

Bullion banks and other traders arbitrage between futures markets, ETFs and the OTC market (otherwise prices would not stay in alignment) so action you see in public exchanges could be balanced by offsetting positions in other markets that are not visible to you. The relative wealth of data available on futures markets, and lack of data on OTC markets, can lead analysts to become myopic and forget that there may be other market forces from the OTC market impacting on the “visible” public exchange traded contracts.

Aug 072015

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.

Jul 172015

In March 2015 the CME launched a gold kilobar futures contract. As with all futures contracts, vaulters apply to be a warehouse and as part of that they have to report registered and eligible stocks in their vaults. Currently there are three vaults reporting figures:

  • Brinks – 820,204 ounces
  • Malca-Amit – 36,909 ounces
  • Loomis International (ie Via Mat) – 17,779 ounces

The figures above are pretty representative of the average balances held by these three since the contract started trading. It is interesting that the Hong Kong warehouses have never reported any registered stock – it is all eligible. Compared to the CME’s US warehouses however, the 874,893 ounces of gold held within the Hong Kong warehouses is only 10% of the US stock of 8,751,688.

I hadn’t given the Hong Kong contract or its warehouses much thought until Ronan Manly, who writes for BullionStar, drew my attention to this submission by the CME to the CFTC “self-certifying the listing of a Gold Kilo Futures contract”.

As part of that submission the CME provides an analysis of deliverable supply so as to determine a conservative spot month position limit. To do that analysis “the Depositories that are intended to be approved by the Exchange … provided historical inventory levels of gold kilo bars stored in their respective vaults that meet the specifications of the Gold Kilo futures contract.” Those two depositories were Brinks and Malca-Amit.

The chart below shows the result of combining the data from the CME’s submission (monthly averages) with reported warehouse stocks for the HK contract supplied by Nick Laird at Sharelynx.com – note that the submission data only goes up to November 2014 and the contract starts trading in March, so we have a gap in our data.


You can see that someone(s) was accumulating kilobars all through 2013 and 2014, with the major surges being between Dec 2012 to Feb 2013 and Nov 2013 to Jan 2014. The interesting thing about that gap in our data is the massive drop of about 110 tonnes in the space of three and a half months. Where did it go?

The first theory may be that it went to the SGE to meet Chinese demand. However looking at exports from Hong Kong to China during that period shows no significant changes in volumes. There is also no indication that Chinese demand surged during that period, with SGE premiums (an indicator of demand) remaining subdued and SGE withdrawals at a high but relatively consistent rate.

The other possibility is that the owner(s) of that 110 tonnes realised that come March 2015 their previously unreported (at least until the CME submission) hoard of gold would suddenly become public, as CME futures warehouses, according to the CME rulebook, are (my emphasis) “required to report inventory to the Exchange .. Eligible metal shall mean all such metal that is acceptable for delivery against the applicable metal futures contract for which a warrant has not been issued.”

The purpose of that rule is to give the market visibility into potential stocks that may be traded on the contract, and also to avoid games where someone could take metal off warrant (no longer be registered) to give the impression there is little stock available to the market in the hope of giving the impression of a shortage.

The only way the owner(s) of that 110 tonnes could avoid be reported would be to move the metal into a non-CME warehouse, it being my assumption that the CME does not give exemptions to its warehouses on reporting the stocks of individual owners.

The chart below shows the combined Hong Kong and US warehouse data from Sharelynx.com. Note the data gap marked (1), which shows how significant the 110 tonne reduction was in terms of overall CME warehouse stocks. It is interesting to note that the area marked (2) begs the interpretation that metal was moved from the US to Hong Kong, although my cursory analysis of US-Hong Kong imports and US warehouse withdrawals does not confirm this.


I noted previously that the rapid “decline in registered gold stocks and delivery rates occurred soon after gold’s dramatic crash through $1550 and into the 1300s” and it is interesting to note that the rebuild of overall stock (in Hong Kong rather than the US) appears to have begun after gold bottomed for the second time at $1200 in December 2013.

One final note on the CME submission. As mentioned, the CME used Brink’s and Malca-Amit’s data to determine a “conservative” position limit: “As the basis for assessment of deliverable supply, the average monthly combined gold kilo bar inventory … is 89,408 kilo bars. Staff proposes a conservative spot month position limit of 6,000 contracts which is 6.71% of deliverable supply.”

Given the massive drop in Malca-Amit’s warehouse stock, I think it could be argued that a review of those position limits is warranted. The average Hong Kong warehouse balances since the start of the contract’s trading has been 27,730 kilobars (with a minimum of 17,296 bars and a maximum of 40,587 bars), which at 6.71% of deliverable supply would be 1,860 contracts, which we can round up to  2,000 contracts – compared to the current 6,000 contracts.

Jul 142015

China continues to open up its gold market, with plans to launch a renminbi-denominated gold fix and talking with the CME to “list its products and prices on CME, whose members and clients will be allowed to trade the Chinese exchange’s products”. Such news reports are usually accompanied by references to China wanting to “increase its influence in global gold markets” in line with its size in the physical market.

Such developments are generally seen by goldbugs as positive, the narrative being that China is a physical gold market and they love gold and only buy it (never sell), which will mean that will we have a market “that is not distorted by the banks, their proprietary trading, or control of the gold distribution system globally”, according to Julian Phillips, for example.

No doubt Pierre Lassonde will be right when he said that “10 years down the road, the Shanghai Gold Exchange (SGE) is likely to determine the gold price, not the COMEX” but a closer look at the Chinese market reveals it may well be a case of “Meet the new boss, Same as the old boss”.

While the SGE’s most popular contract is the 9999 Gold, the deferred delivery contract (like a forward) also attracts a lot of volume. People also forget that there is a Shanghai Futures Exchange, which has a gold contract no different to Western gold futures.

Consider also the Bank of China International, who recruited a “former Goldman Sachs metals trading chief as an adviser to help it expand its commodities business”, someone who was on the management committee of the London Bullion Market Association and an executive committee member of the London Metals Exchange.

Or how about the Industrial and Commercial Bank of China, who is reported as launching “gold accumulation schemes, swaps, forward hedging, lease/financing, collateralized loans and other financial services” and who “is working with HSBC, JP Morgan Chase, Brink, Metalor and other professional logistics providers”.

Chinese have been involved in using “gold to engage in currency and interest rate arbitrage transactions”, collateral financing trades, or leasing and selling gold “from banks to solve their short-term funding problems in the hope of buying back the gold at lower levels to repay the lease” (see here), so much for Chinese only being buyers.

While the Chinese are indeed large consumers of physical, I think it is naïve to think that as their gold market matures their bullion banks will refrain from the same exchange/over the counter proprietary paper trading activities that Western bullion banks do, or that the same greed dynamic we have seen driving leveraged Chinese stock market investing (via official and hidden margin lending: link) will not occur in the gold market.

This dynamic is no doubt what was behind Pierre Lassonde’s forecast that “when we reach the peak in this gold cycle, the SGE will resemble a casino. The Chinese have a huge propensity for gambling, and this is what will likely propel the gold price to levels that we probably can’t even imagine.”

And then to a crash we probably can’t even imagine.