25 January 2014

Comex Potential Claims Per Deliverable Ounce 112 to 1 As Their Warehouses Show Thin Inventories

As you know January is a non-active month for gold on the Comex, but February tends to be quite lively.   The structure of the gold market flashed a 'buy signal' here on 15 January.  We have yet to see a confirmation by price on the gold daily chart.

Here is the warehouse inventory picture for registered (deliverable) gold ounces. As you can see without exception the levels of bullion ready to be sold is quite low.

As a reminder, that is only one side of the picture. There is an additional category of gold held in these warehouses in 'eligible' bullion form that can be transferred to deliverable with the issuance of some fairly simple paperwork.

So I think that those who talk about a default on the Comex are probably missing the bigger picture.  Supply and demand suggests that higher prices might be required to persuade profit maximizing bullion holders to make the switch from storage to sale.

But then again it is not bad to recall that not everyone who is trading bullion is making their profits on the Comex, especially by actual bullion sales. The great bulk of trading traffic is what the FT calls 'pixelated' or paper gold, claims upon rehypothecated claims. 

Therefore I have suggested that if there is a break in the gold market, it will not be likely to originate on the Comex, but rather in some physical delivery market in Asia, and even perhaps at the LBMA in London.   Any failure at the Comex would most likely be collateral damage to a panic run on bullion, either in a fail to deliver from a bullion bank or exchange, resulting in a massive up limits short squeeze deleveraging.

The current structure of the market looks a bit dodgy.  JPM has the clear whip hand on the paper markets.  But Asia and the Mideast are dominating the physical delivery markets. 

India demand is being throttled by the government sahibs that seem quite eager to accommodate the Anglo-American Banks, which is too bad for their people.   I doubt that posture will be sustainable for long.

So let's see what happens.  But it looks as though February could be interesting.  And if not, then the next active month is not far away.  

At the end of the day the market structure must be allowed to reach its clearing prices, and that does not seem to be the current case judging by the relationship of paper to physical.

As always, a special thanks to chartsmaster and data wrangler Nick Laird of sharelynx.com.