05 January 2009

Is the Comex Doing Fractional Reserve Delivery of Gold?

An acquaintance who works for a small precious metals fund sent this to us today, asking if we had ever heard of anything like it.

The short answer is no, but this is not a strong area of specific expertise and recent experience for us, and we never attribute to a bad intent what we can attribute to sheer incompetency, especially when dealing with large organizations.

But when one is promised specific bars with specific serial numbers of a specific size and weight one week, and they are not available the next week when you confirm that you wish to receive them, that brings up the same kind of red flags that have been so notoriously ignored by regulatory agencies in other recent cases. Of course the Comex is no Bernie Madoff.

It does bring into question the integrity of the Comex records and their contracts, and the condition of their audits and inventories. We would have a fit if someone did this to us after an online auction or a personal purchase transaction. Why should the Comex be allowed to sell what it does not have, and then dictate new terms after the fact? Especially when this same customer had been routinely taking delivery off emini contracts from Comex before this.

And it does put a fresh emphasis on the old adage, "When in doubt, take it out."

We accumulated 3 emini gold contracts on CBOT for December delivery and we had been given serial numbers and weights last week for the 3 bars we were to receive.

Today we are informed that Comex is invoking a rule in which they can deny delivery of individual mini bars (roughly 33 ounces) and issue you only a Warehouse Delivery Receipt (WDR) against your mini-contract unless you have 3 WDR's, and then they'll issue you a 100 oz. bar.

Otherwise, if you have only 1 or 2 mini-contracts, you only own a WDR, which you sell by shorting a mini against it. If you own a WDR for a 100 oz., they encourage you to safekeep the gold at the Comex and hold a vault receipt.

CLEARLY, the Comex has run out of the bars that were being delivered to holders of emini contracts. Our back-office guy told us that he's been doing Comex deliveries for 30 years and he's never seen anything like this, and he's never heard of this rule on the mini contract. (update: its in the contract if you read it - Jesse)
Fortunately we have 3 WDR's and we will be getting delivery of a 100 oz. Comex gold bar.

But this whole episode brings into the question the validity of the Comex gold inventory. More importantly, the Comex is now going to issue WDR's, which are paper.

Are they becoming a "fractional" reserve depository, where they can issue several WDR's against the same bar of gold, knowing that some of those people will opt to keep storage on Comex and never require actual physical delivery?"