COMEX to default or just another false alarm?

[Adeptus]

Yes, yes, I know "Comex is going to default!!" is practically an alarmist cliche that everyone rolls their eyes at these days, but here we are at yet another supposed record low with less than 164,000 oz of gold left in the vaults and a record 207:1 ratio of physical gold to paper gold. Is this all just bean counter number shuffling or should we really be paying attention this time?

And yes, I'm going to quote ZeroCred here...
http://www.zerohedge.com/news/2015-0...liverable-gold

One week ago, when we reported the record plunge in registered gold held by the various Comex gold warehouses in general, and JPMorgan in particular, which saw the "gold coverage" ratio, or the number of paper claims through open futures interest for every ounce of deliverable gold, soar to what we then thought was a record, and unsustainable 207x, we thought this situation would be promptly rectified as a few hundred thousand ounces of eligible gold would be "adjusted" back into the "registered" category.

Not only has this not happened, but with every passing day the situation is getting progressively worse.

According to the latest Comex vault data, not only was another 157K ounces withdrawn today, but the conversion of Registered into Eligible continues, and as a result another 10% of total deliverable gold was "adjusted away", leaving just 163,334 ounces of registered gold: the lowest in Comex history.

As a result, the ratio of Eligible to Registered gold is now a record high 41.2x in the history of the Comex.


Once again the culprit for the decline was JPM which saw not only a 122,124 ounces of Eligible gold be withdrawn, reducing the total by 13% to 750K ounces, but 8.9K ounces of registered gold was pushed into the Eligible category, in the process reducing total JPM registered gold by 45% overnight to a paltry 10,777 ounces: this amounts to only 335 kilograms of gold, or just 27 bricks of "good delivery" gold.


Finally, since aggregate gold open interest continues to remaing consistent at just about 41 million ounces of gold, today's latest ongoing reduction in deliverable Comex gold means that as of yesterday's close, there was a record 252 ounces of gold paper claims to every gold physical ounce of currently available and deliverable gold.

To summarize: last week we were confident that JPM would promptly adjust a few hundred thousands ounces of Eligible gold back into Registered status to silence growing concerns about Comex distress. A week later we are not as concerned by the relentless surge in paper gold dilution, as we are that JPM still has not even bothered to do this. Especially since with just 335 kilograms of gold, or less than 27 bricks, JPMorgan is now just one withdrawal request away from running out of deliverable physical gold.

[Mega]

Re: COMEX to default or just another false alarm?

"They" settle in PAPER...................

[lektrode]

Re: COMEX to default or just another false alarm?

Yes, yes, I know "Comex is going to default!!" is practically an alarmist cliche that everyone rolls their eyes at these days, but here we are at yet another supposed record low with less than 164,000 oz of gold left in the vaults and a record 207:1 ratio of physical gold to paper gold. Is this all just bean counter number shuffling or should we really be paying attention this time?

And yes, I'm going to quote ZeroCred here...
http://www.zerohedge.com/news/2015-0...liverable-gold

being one of them types who believes the ole saw about 'where there's smoke, there's usually FIRE'
it isnt just 0C who's reporting on this 'seemingly meaningless' data:

http://jessescrossroadscafe.blogspot.com/

(and IMHO to label ZH as 0C is to ignore who puts it all together... and it also seems that they are more credible than some of the other sources of analysis ... seeing as most of what eye've read on that site has ZILCH in the cred dept....just sayin....)

[charliebrown]

Re: COMEX to default or just another false alarm?

If I read things correctly, some eligible gold can be immediately registered if the owner of the eligible gold has an agreement to sell at a given price.
Therefore, I think if COMEX registered gold falls to zero, they can just increase the offer price and gold will flow from eligible to registered.
I don't know what kind of bump in prices that would be ???? I don't know how tight the owners of eligible have on there gold. It seems that for the last 4 years USD's are as good and better to hold than gold. I know things will change. I just don't know for how long things can last.

[Adeptus]

Re: COMEX to default or just another false alarm?

If I read things correctly, some eligible gold can be immediately registered if the owner of the eligible gold has an agreement to sell at a given price.
Therefore, I think if COMEX registered gold falls to zero, they can just increase the offer price and gold will flow from eligible to registered.
I don't know what kind of bump in prices that would be ???? I don't know how tight the owners of eligible have on there gold. It seems that for the last 4 years USD's are as good and better to hold than gold. I know things will change. I just don't know for how long things can last.

What you say makes sense to me. Eligible apparently does reflect physical gold in the warehouse, it's just not registered for futures contract trading and can't be delivered to a third party to settle a trade; or as is the case with the vast majority of trades - the registration receipt can't have it's ownership name changed (the gold remains in the warehouse the entire time and doesn't actually move - only the ownership). Thus those screaming 'Comex will default' (on the delivery of physical gold), are wrong, so long as there's plenty of eligible gold willing to be registered - which would make sense for a higher price of course.

Source: https://www.bullionvault.com/gold-ne...ocks-072420136

So with the gold inside the warehouse, second question: When is the gold considered eligible or registered on the commodities exchange?

Answer: When acceptable bars are brought into an exchange-approved warehouse they become "eligible" for settlement of gold futures contracts traded on the exchange. So at this point, the owner of the bars may deliver them onto the exchange, and warehouse receipts are created. That is when the gold bars become "registered" stocks.

Eligible gold stocks may or may not ever become registered stocks. Why? Because the warehouse is still a warehouse and the owner may simply want to vault their metal securely, before using it to meet demand elsewhere – for manufacturing, or from investors in another marketplace, such as Asia. This eligible gold may belong to an investor, a refiner, a hedge fund, a bank or producer. Many times these people are holding the metal for their end customers. And it may move at any time, and is much more flexible than the warehouse receipts that are registered stocks.

The CME, the exchange, does not have any direct control over nor interest in the size of eligible stocks. Registered stocks however are officially recognized by the CME for good delivery on the exchange. That means that this inventory exists and is set aside to make delivery against gold futures contracts. Traders who stand for delivery, rather than cash payment, when their contract settles take delivery of the warehouse receipt. This does not change the quantity of registered stocks inside the warehouse. It remains registered, but the receipt changes ownership.

If a gold futures buyer wants to take physical delivery of the gold and "break" the receipt then this is possible. But it is a process and takes time. Once broken, if the gold remains in the exchange circle of integrity – meaning the exchange-approved warehouse – then those bars become eligible stocks. But if the gold bars are removed from the exchange-approved warehouse then they no longer are eligible and are no longer tracked in any way.

Third question then: How do the warehouse receipts work?

A warehouse receipt is a bearer instrument much like a check. It can be endorsed from one party to another. The holder of the receipt pays the storage costs. Most times when people take delivery of a warehouse receipt they leave it with their brokers. In some cases people may want to take possession of the warehouse receipt themselves. This is rare, just like with equity or bond certificates; no one actually takes delivery of the documents any longer. But it is still possible for a fee.

If a person owns a warehouse receipt, the gold that it represents is still in the registered stocks, even if they have taken physical delivery of the document. They can always redeliver these receipts onto the exchange by selling contracts.

VIDEO Explanation

The other thing I've read is that COMEX does have the option to settle a trade in fiat, instead of delivery of physical gold, but it would make sense that if that happens it would be for a very short period of time until the price climbs higher and finally some eligible is registered and then delivered upon for those that really want physical delivery (extremely few?). That said, failure to deliver physical gold on a registered contract would technically be called a "default" but it doesn't mean the end of the exchange, it just means prices will move higher.

I think this chart makes it obvious that in fact supposed physical gold has net increased in the wharehouses as eligible by nearly 80% since 2008 - so in theory nothing to really worry about.



I think what's missing from this chart is the corelation to the price of gold. So I've borrowed the Multi-Year gold chart from 1995 to 2015
from here: http://www.kitco.com/charts/historicalgold.html and used my photoshop skills to overlay the price chart (red) onto the above chart. An interesting pattern emerges. Since 2004, eligible gold rise generally foreshadows a higher price of gold! A drop in eligible also foreshadows a drop in the price of gold. That said the pattern breaks around middle of 2013 for some reason, where eligible goes up and price goes down. So if registered ever does go to zero, will we see a correction of the price upwards to re-establish the previous pattern? Place your bets! ;-)





So will the COMEX cease to be an exchange soon because of historic low registered levels of gold for trading? Not likely. Will the price of gold move higher as a result of the above? Possibly - but the pattern has diverged nearly 2 years ago, so who knows when or if it will revert to the mean again. Also, it is worth poing out at the COMEX is one of several global gold trading warehouses, and I havent analyzed if all the other ones are showing similar patterns.

Until then, enjoy this video....