07 June 2013

Comex Registered Gold Inventory Continues Its Decline - Fat Tails

Comex registered gold levels continued their decline to the sub 1.5 million ounce level.

As you know tomorrow is Non-Farm Payrolls day in the US.

The trading desks typically like to hit gold and silver with a bear raid on a day like that, especially if there is a whiff of QE to come.

There is quite a bit of gold sitting in the eligible category at the Comex. Let's see what it will take to get the owners of that bullion to consider parting with it.

There are 2,950 gold contracts remaining open for June, for the equivalent of 295,000 ounces.  So there is certainly plenty of room for the wiseguys to keep pressing their luck. Although we must remember that as easy as it may be to transfer bullion from the eligible to the registered category, the reverse of that process is also present. Owners of eligible bullion may change the status of their bullion to 'not offered for delivery' or eligible, not registered.

While the music keeps playing, they must keep dancing, as former CEO Chuck Prince of Citigroup said during the run up to the recent financial crisis in 2007.

There are a total of 374,891 gold contracts open now representing 37,489,100 ounces.  Of those 214,870 contracts are open for the next active delivery month of August representing 21,487,000 ounces.

The average daily volume of trading is about 165,000 contracts, representing 16,500,000 ounces.

Very few contracts are ever taken to delivery. The price setting mechanism for the global gold market these days is largely a paper exercise involving little actual metal ever changing hands.

While this facilitates speculative interests, it is hard to rationalize how this depth of liquidity and volatility, without ties to fundamental anchors of supply and demand in the real world, provides any real benefit to producers and consumers who wish to obtain products and hedge risks.

I think that the exemptions that were granted to some institutions which are neither legitimate producers and users of the commodities, or representatives of producers and users, has financialized the markets to an extraordinary degree.

The lack of effective position limits and disclosures for the basis of very large positions, specifically in the silver market for example, is setting up a potentially volatile situation. And that is surely visible to other organizations and entities around the world.

To continue to ignore this is probably not a wise policy.  A single announcement by a large organization or even a foreign entity could have a deleterious effect on the quality of confidence in these highly leveraged markets that deal in products with real world consequences.  A loss of confidence is easier to avoid than to repair.

There is big money to be made with leverage.  And that causes reforms to be resisted, and regulators to bend to the political and ideological pressures of the monied interests.

These things can go on like this for quite some time.  And they normally do, in normal times.

Let's see what happens.