Another Ten Tonnes of Gold Bullion Came Out of Comex Eligible Inventory at JPM Yesterday

"And we headed out of the hotel, went to the airport, got on the plane and, about halfway through the flight, I found myself alone in the President’s cabin with him. I said, 'Mr. President, you don’t have a cold. There’s something else going on.'

He said, 'You bet. There is something else going on.' And he said, 'When you find out, grab your balls [and run].'

Pierre Salinger, On the Cuban Missile Crisis

If I were short bullion I might consider squaring up and inching towards the exit, just to be on the safe side.

I cannot believe how little gold is left at Brinks.   They have gone from total ounces of about 650,000 at the end of 2012 to a little over 186,000 ounces now.

Brinks and JPM only have about five and one half tonnes up for delivery.   The two big boys are HSBC and Scotia, and they only have a little over six tonnes up for delivery between them.

That does not mean, however, that we will not see the usual shenanigans in the paper metals markets.

It's what they do, until they can't. And then they ask for a change in the rules, and a bailout.

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.

Comex Warehouse Potential Claims Per Deliverable Ounce Rises to Historical High 112 to 1

"The false man is more false to himself than to any one else.  He may despoil others, but himself is the chief loser. The world's scorn he might sometimes forget, but the knowledge of his own perfidy is undying."

Horace Mann

An almost shocking decline in deliverable (registered) gold has taken the ratio of open interest to deliverable gold to 112 to 1.

This is not a default scenario since the supply of eligible gold in the warehouses remains adequate and at historically manageable levels as shown in the last chart below.

Rather, it suggests that higher prices will be required to persuade more bullion owners to place their inventory up for delivery.

That higher price, of course depends on who those owners are, and how motivated they might be by profits from their metals trades.  For some interested parties it is enough to be the very close friends of the Central Banks, with benefits that make them incredibly rich, self-satisfied, and occasionally audacious to the point of over-reaching.

But of course, it is well to remember that the Comex has become the tail wagging the dog, as the gold bullion markets have shifted to the East.

February may be an interesting month, in an interesting year.

Weighed, and found wanting.

Stand and deliver.

Gold Daily and Silver Weekly Charts - Interesting Development at the Comex

I thought it was interesting that 63,877 ounces of gold bullion left the registered inventory from Scotia Mocatta yesterday.  That brings the deliverable category down to a new low of 416,563 ounces for this leg of the bull market. 

In the past these big declines have tended to mark an intermediate price trend change within six months or so.  Let's see if that holds true this time.

As an aside, I wish to remind you again that the registered, or deliverable category, is not the sum total of all bullion at the Comex.  There are 7,711,145 ounces of bullion in storage that can be placed into a deliverable state with a procedural action. 

For my purposes, this is more of a indicator of pricing preferences, or a willingness to sell, rather than some likely default scenario. I know I have said that quite a few times, but I wanted it to sink in, especially for those who choose to misrepresent what this data implies, for whatever reason, bullish or bearish.

And I will probably post the latest chart on this later tonight.  Because one would tend to think that when available supply placed on the market becomes exceptionally low at certain prices, it could likely indicate higher prices will be required to bring additional supply to market. 

Not all supply is equal, in availability and quality, and prices are, after all, set at the margins.  Water water everywhere, but not a drop to drink, and all that. 

When fellows make the case that all the gold in the world is part of the supply in the same way for the purposes of supply and demand calculations I have to chuckle to myself.  Nothing could be further from the truth in almost every commodity I can think of, including gold.  Things are held by different actors for different purposes.

There are also those who will say, 'you cannot trust this data it could be faked or wrong.'  Yes, a lot of things could be this, or could be that.  Life is a school of probabilities.  But I notice these same people do not seem to hesitate to use the data they prefer for their own purposes, which also could be faked or wrong. 

So I think we can stipulate that we have to use any data we have with some reasonable caution and skepticism, especially in markets that are opaque.  There is plenty of gaming and fraud in these markets.

But if someone wishes to start dismissing the meaning of some data because of some degree of doubt, then they may as well apply that same stringent criteria to all the data which they use.  And in many cases if they do this, they would be compelled to shut up, because they will have nothing meaningful to say.  Alas, such integrity is very rare indeed.

So I think I will prefer to look at all the data available and pertinent, and draw reasonable inferences, testing them along the way, always looking at multiple sources and confirmations.  There is nothing wrong with formulating hypotheses.  That is what is known as 'the scientific method.'   It is what you do with them and how you use them that counts. 

And to that end if working with other people to find out what's what proves fruitful, I will do it of course, always and everywhere. That promise is the practical side of working hard on a blog for 'no pay.'  There are some others, but not easily accounted for on worldly ledgers. And it is more useful than watching sports, or reality TV, or whatever people do these days with their leisure hours.

But some sources of information are relatively dry wells, and not worth the time and effort to try and pull out anything, of even marginal value. 

Yes there is the value of educating the stubbornly ignorant, and the hope of mutual benefit, always.  And the mule may need a good washing, but that does not mean that I'm the one who is going to do it.  These days I would rather wait for rain.

Have a pleasant evening.

Comex Warehouses: Potential Claims On Deliverable Bullion at Historically High 80 to 1

“When you can measure what you are speaking about, and express it in numbers, you know something about it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science.”

William Thomson Lord Kelvin

I think we can stipulate that the lack of real transparency in the precious metals markets, among too many other markets, is appalling. But that is the nature of our fraudulent times.

January is a non-active month for the metals, and overall inventories are adequate for the meager deliveries on the Comex.

Those who hold bullion will need some incentive to move it to the deliverable, registered category for February, which is often a significant physical delivery month for the New York paper markets.

But all in all, the Comex is now the tail wagging the dog, a paper sideshow to the real bullion markets which are moving East.

This is something that very few economists have yet to internalize.

Gold Daily and Silver Weekly Commentary - Year End Paint Is Dry, Metals Rebound

"You get tragedy where the tree, instead of bending, breaks."

Ludwig Wittgenstein

There was intraday commentary on the metals here.

I have included the CME metals depository data below. There were no additional deliveries noted on the 31st. There could be a little more action ahead, but January is a 'non-active month.'

The bifurcation of the precious metals market between paper and physical bullion is widening into a yawning gap. I do not know what will end this, but I suspect that it will end unexpectedly and quickly, and is likely to be noticeable.

Happy New Year. Welcome back.

Comex Claims Per Deliverable Ounce of Gold at 92 to 1 - Let Them Eat Treasuries

Luckily for the Comex most of the gold deliveries this month have been taken by JPM for their 'house account.'

January is not an active month for the precious metals on the Comex, so the wiseguys only need to muddle through the next couple of weeks, and then it should be clear sailing until February.

I hear the bullion banks are putting some heavy pressure on the miners to hedge their forward production, and even on some central banks to lease more gold. I am a little surprised that there have not been more acquisitive moves on the miners at these fire sale prices.

This situation on the Comex is not a default scenario per se. There is plenty of gold available, but it might require higher prices for customers to present their bullion for delivery. Unless of course that customer is a big bullion bank which is playing multiple sides of the same market.

Still, it pays to be prepared I suppose, even for the unlikely. CME Seeks To Broaden Cash Options In Clearinghouse Members Default Rules

Have a great holiday.

JP Morgan Takes On More Gold, 61,790 Ounces Come Out of Mocatta

The big stopper JPM added about two tonnes of gold, and 61,790 ounces of bullion came out of the Scotia Mocatta registered inventory.

This brings the total deliverable (registered) ounces of gold down to 432,612 which is a number that we have not seen in this inventory category since the early 1990's, well before the gold bull market.

Supposedly Simon Weeks of Scotia Mocatta, who is also the chairman of the LBMA, was encouraging producers to start hedging their production, committing their bullion to the banks before prices fall any further.

Now I don't know if that is true, but if I were a highly leveraged bullion bank or mint, and I had multiple paper claims on each ounce of inventory, I would probably encourage my analysts and other sales associates to talk up the bear case too.  But this is what Andrew Maguire says, and it is only hearsay. 

If I were such a one as Weeks I would come out and deny it, if it was not true.  Either you said something as market guidance to some participants, or you did not.

By the way, I wonder what happened to those two JPM whistleblowers that Andrew knows, who are stashed away in some lawyers' offices somewhere.

What a funny, opaque market.  More like a game of liar's poker than an efficient and transparent clearing mechanism where informed producers and buyers meet to allocate resources.  But economic theory says that fraud is not possible because people are purely rational and act in their long term best interests, always.  And at least on the mythical planet of Vulcan, where many Ivy League economists apparently originate, logic dictates that honesty is the best policy.

Comex Claims Per Deliverable Ounce at 79 to 1

Not to worry, JP Morgan has the situation well in hand.

They are just recycling the deliverable for the next go round in the next active month, February. 

What could go wrong?

JP Morgan 'House Account Only' Trading in Comex Deliveries for 2013

"Are the hedge funds, HFT’s and algos currently having a field day with this worn out trade paying any attention to the steady drain of physical gold on which their speculations are based? As is usually the case in a temporarily successful momentum trade where almost the entire universe is aboard, the answer is probably not."

John Hathaway, The Big Picture in Gold

Here is a chart that I was able to construct from CME data that shows JP Morgan's Comex Gold Delivery activity for their 'house account' only.

I have marked the nominal price of gold on the chart for this year. The last data is as of December 10, 2013.

The months marked with boxes are 'active months' for the delivery process. December is also an active month.

They seem to have had quite a good year for themselves so far. 

For those who would like some color commentary, JPM came into February issuing deliveries to beat the band.  They were quiet in the inactive month and then back swinging hard and delivering in size during April.

In August JPM stopped or took delivery on quite a chunk of gold bullion and the price recovered a bit from its first half of the year pounding.  I can conceptualize this as 'covering' what they have issued in the first half of the year.

Since then the gold price slumped back down into November.   JPM started taking deliveries (stopping) again very heavily in December.   I hear they are stopping something over 90% of warrants issued.

However for the year, and for the year only, their net position is still about 7,600 more contracts issued than stopped in their house account.   This is down from a high of 14,600 contract net issued which they maintained from about April through July. 

I have just added a second chart that shows just the rolling 'net position' for their house account with regard to deliveries for the year.   Just for the sake of tracking their notional position for the year I am going to refer to this as their 'short' although they could just be selling from any inventory which they had somewhere or from the prior year.   And please bear in mind that while this chart show a position that is all negative for the year,  I wanted to be able to plot it against the price of gold, so I inverted the Y axis.

Whether this represents an actual short position or not depends on their opening inventory of gold bullion owned by them, how much of the gold delivered was rehypothecated or leased, and how those contracts were actually settled, be it in equivalent instruments, cash, or actual bullion from whatever sources.

I know this is not all the data we would like to see, and does not begin to address their offsetting positions in other transactions and markets like derivatives.  

And of course I am sure that this is all 'just a hedge' being done in the CTO risk management area, just like the London whale.

Speaking of gold market antics, GATA just sent out this delightful presentation from the Banque de France entitled Managing Gold as a Central Bank.

And here is The Big Picture In Gold by John Hathaway which I recommend that you read.

And the band played on.

Have a pleasant weekend.

Delivery Day: Why a Comex Default Is Unlikely as a 'First Mover' Event

"The very hirelings of the press, whose trade it is to buoy up the spirits of the people. have uttered falsehoods so long, they have played off so many tricks, that their budget seems, at last, to be quite empty."

William Cobbett

A couple of people pointed me in the direction of this CME rulebook when I asked for some details about how there can be so many deliveries in a highly active month like December, but so little outgoing activity can be shown in the warehouse inventories.  And several more offered their own information, and I thank them for it.

Here is a link to the CME Rulebook On Deliveries

Another fellow was kind enough to send a couple of the most pertinent passages my way. They are included below. 

As you can see, a 'delivery' can be made, and most likely is most often made, by the transfer of a Warrant for the metal. The Warrants are issued and backed solely by the licensed facility, ie the specific warehouse controlled by JPM, HSBC, etc.

The Warrants have no expiration, so one might assume that they become traded around like currency, for those in the business of not actually taking physical delivery and moving their bullion out of the warehouse complex.

And I would not assume that even a licensed operator like JPM would move their house account bullion out of another operator's warehouse to save on storage costs,  because they typically are not engaging in long term holdings that would make it worthwhile. 

I don't think it becomes too hard to see how this structure, which to my knowledge is not audited, can become quite the twisted paper chase of counterparty risk and rehypothecation, given the general practices of the Banks in some many other areas.

As an aside, I do not necessarily believe that JPM's stopping the vast majority of the gold deliveries for their 'house account' is a bullish sign, not at all.   But it should at least raise some eyebrows that a 'market maker' is buying bullion so heavily for its own account.  Is this to underpin short side obligations in some other markets?   Only the bookkeepers know for sure. 

By taking these warrants and the underlying bullion for their own account, they may even be controlling its disposition of the bullion, eg. making sure it remains within the Comex licensed facility complex and is not taken out and melted into bars for use on other exchanges in Asia.   The Comex inventory is rather thin after all.

By the way, we do know that an operator is taking delivery for their house account, versus a customer, because there is a CME report that explicitly shows this.  I was surprised at this level of detail.

To sum this up, I am now even more persuaded that if there is any default or sudden deleveraging in the gold market it is unlikely that the Comex will precipitate this event. It is more likely that some incident in another market more physically based would trigger deleveraging, which would thereafter cascade throughout the paper gold market in London and New York.

Since we know rehypothecation is taking place as a customary business practice, with the only question being the extent of it, and with operators acting as their own regulators in terms of inventory, with even the exchange explicitly taking no liability for their data, I think it is very possible for an incident in the gold market to occur. 

The probability of this cannot be determined for the usual reasons, in that it is not possible to gauge the actual amount of counterparty risk because of the opaque nature of the information and the market.  It could be discovered, but that would require a third party audit.

But there is rehypothecation, and there is counterparty risk. And it appears to be a bit stretched by historical standards. And this post is certainly no defense of the Comex. If anything its connection to the broad global market for physical bullion is more tenuous than I had even thought previously, more like a shell game than a market that brings together producers and consumers. That it is a price setting mechanism for a much larger and broader physical market that plays a key role in the allocation of resources is almost unbelievable.

Some cavalierly point to 10:1 leverage as acceptable, as being customary for Banks holding around ten percent reserves (in another better day before sweeps etc., but that is no matter).

It begs the question that liquidity in the currency markets is significantly greater and more flexible than in the physical bullion market, a fact that so many modern economists often gleefully celebrate.

The Fed can expand its Balance Sheet to kingdom come, but they cannot produce a single ounce of actual gold bullion in that process. And that is why gold is such an emotional topic, so feared and derided in turn, because it resists the forces of fiat money and the human will by its mere stubborn existence.

706.E. Delivery Day
The day on which the long clearing member receives the Warrant for the metal shall be referred to as "Delivery Day." Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but no later than the last business day of the current delivery month

705B-5. A Warrant shall be of unlimited duration and remain valid until cancelled by the Licensed
Facility that issued it.

705B-6. Licensed Facility shall be solely responsible for insuring that no duplicate Warrants are
issued, printed or released by it.

Chapter 113
113102.E. Termination of Trading
No trades in Gold futures deliverable in the current month shall be made after the third last business day of that month. Any contracts remaining open after the last trade date must be either:

(A) Settled by delivery which shall take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but no later than the last business day of the delivery month.
(B) Liquidated by means of a bona fide Exchange for Related Position (“EFRP”) pursuant to Rule 538. An EFRP is permitted in an expired futures contract until 12:00 p.m. on the business day following termination of trading in the expired futures contract. An EFRP which establishes a futures position for either the buyer or the seller in an expired futures contract shall not be permitted...

CME Group Rule Book Chapter 7:
703A-5. "Eligible" shall mean, with respect to any metal, that such metal is acceptable for delivery against the applicable metal futures contract for which a Warrant has not been issued.

538. EXCHANGE FOR RELATED POSITIONS
538.B. Related Positions
The related position (cash, OTC swap, OTC option, or other OTC derivative) must involve the commodity underlying the Exchange contract, or must be a derivative, by-product, or related product of such commodity that has a reasonable degree of price correlation to the commodity underlying the Exchange contract.

It appears that an ETF can be used to settle a Comex futures contract, noting that this is a negotiated settlement and not forced upon the receiving party. There could be subsequent rule changes to this one, but it really doesn't matter much since I am fairly sure they can settle in cash if both parties agree.

Comex Registered Gold Inventory Levels - 65 Potential Claims Per Ounce

"A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules."

Jorge Mario Bergoglio, Francis I

Here are the latest inventory figures of registered (deliverable) gold in Comex approved warehouses.

I am not sure approved can really apply, given the distancing that the Comex recently instituted in the disclaimer on their inventory report.

"The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only."

Perhaps we should start saying recognized, or acknowledged. Comex takes the quantity and quality and availability of gold bullion in these warehouses at 'face value' based on unaudited reports from the vault managers and releases the data 'for information purposes only.'

I will never forget the instance where Harvey Organ and son paid a visit to the Scotia Bank vault, and found so little actual bullion on the premises.  Here is their audio interview from 2010.

The Scotia reports show that the backing for their gold and silver certificates had fallen to 43% at fiscal year end of 2009.   This situation was corrected after being reported to officials. 

While some cavalierly dismiss this incident, saying that Harvey and son 'should have known,' in fact the point was that this was a surprise to many, and it was corrected only through an accidental encounter of a customer with the reality of what the Bank had been doing. 

Sometimes these accidents occurred during periods of stress, as in the case of MFGlobal.   It has to do with the discrepancy between supply and apparent supply.

As a quick word, although some like to refer to the chart below as 'owners per ounce,' I think it is important to remember that the Comex is not really a physical market, and so only a small minority of contracts actually become presented for delivery.

However, the 'potential claims per ounce' of deliverable is a useful metric, especially at the extremes, in much the same way that 'days to cover' is a useful metric for short interest in stocks, keeping in mind the presumption in that figure that the price can rise without restraint.   No one expects all the shorts having to cover at the same time, but the metric is a useful measure of short interest nonetheless. 

And so it is with potential claims per ounce, although in this case we are looking at what is considered deliverable, rather than every ounce of bullion that could potentially exist in the world for what I would think are obvious reasons.

Why don't I just look at the eligible?  Well I do, but one must keep in mind that just because bullion is called eligible does not indicate that it is for sale, not at all.   It is just bullion being stored in a particular form in a particular vault. It is the registered or deliverable bullion that is available at the current price levels, which is really the point after all, isn't it?

And for those who watch the Comex for default, eligible does not work all that well, because in the case of a run on bullion, I would imagine those who have bullion in storage in one of the those acknowledged warehouses would pull their own stock out fairly quickly, as they might be permitted.

As you know, and as I must remind you, Comex could suffer a break in confidence, a de facto default, but an actual default is not likely because of the exchange's ability and possible willingness to invoke force majeure and dictate a settlement in paper money.

If some incident should provoke owners and investors to wish to take possession of their bullion, one must consider what the implications might be.   How long will they have to wait to receive their property, if it will be returned at all, or in kind at some dictated settlement price?

Is this some extreme circumstance not worth considering, to be sneered at by the usual apologists,  those who think of bullion very cynically as just a trade?  Don't worry, nothing to see here, move along. 

There is plenty of hyperbole on both sides of these questions.  I try not to add to it, but to keep going with what can be discovered, in the hope of shedding some light on the subject.   And so I tend to ignore the misleading statements or insubstantial comments made by those who are merely seeking an audience.  And I would urge those who are on the bullion side of things to tone it down to the facts as well, although the urge to be heard is often a strong allure.

If anything, I blame the government regulators and the exchanges for the opacity and lack of firm understanding in the markets for certain commodities.  If there was clarity, the amount of speculation would be significantly reduced.  But apparently they do not wish to do this for whatever motives they might have.

How can one have confidence in a commodity system in which prices are set on an exchange that rarely involves actual delivery, and whose inventory levels are issued 'for information purposes only' without audits?  

Given the recent experiences of those who held bullion claims with MF Global who were handed a dictated settlement, and the people of the nation of Germany who will be waiting seven years for the delivery of their property, I think not. 

There are always those who will say, 'no problem, nothing has broken yet.  Don't be an alarmist.'  And they will continue to do so until a thing finally hits the wall, and people get hurt.  And then they will have walked away, no longer to be found.   This is what happened at MF Global. And in the financial crisis of 2007-2008.  And continues to happen today.

As always, the devil is in the details and the leverage, and what has been hidden will be revealed.  Eventually.

Comex Registered Gold Falls To 587,235 Ounces - Claims at 63 to 1 - The Karma of Buddha's Palm

There was a rather large adjustment into eligible gold storage at the HSBC warehouse as 51,617 ounces left the deliverable 'registered' category.

This is not such a big short term issue since November is a' non-active delivery month' for the Comex precious metals futures markets.

But in fact there is so little actual physical delivery activity taking place there anymore, even in an 'active month,' that one might argue that the New York metals market is approaching practical insignificance, long before it can reach the storied permanent backwardation.

However, one must keep up appearances, since the Comex still effectively sets the metals price for much of the free world, if only aspirationally these days for Asia.

More charts will be added as they are updated later this evening.

Earlier today in a piece about price premiums in India I included a link to the online section of Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds.

You might want to have a quick glance over the chapter regarding John Law's highly innovative dalliance into the théorie monétaire moderne that was adopted by the nation of France, almost to the point of its demise.  It is a useful reminder that truly, there is nothing new under the sun.

As theoretical as all these pricing antics and market manipulations might seem, exercises in price setting for personal greed or policy considerations have real world consequences, especially when they are applied over long periods of time, and with some resort to coercion.

The longer that valuations are maintained against the market, the stronger the coercion to sutain them must become, to the demise of freedom, and the point of exhaustion and collapse.   The Soviet ruble is a possible case study for what happens when the unsustainable meets the inevitable, even with a hairy knuckled police state backing it up. 

We might start thinking about 2014 as the year of financial consequences.

Weighed, and found wanting.

Stand and deliver.

Registered Gold By Individual Comex Warehouse

"Bright star, would I were steadfast as thou art..."

John Keats

Despite the price takedown yesterday, the open interest drifted higher, taking the claims per ounce of deliverable gold to 62.9 to 1.