26 April 2013

COMEX stock drawdown: single most important metric to watch

To understand what is going on with COMEX stocks, don't look at the stock level - it will lead you astray. You need the metric I presented at the Gold Standard Institute's 2009 seminar; one which Professor Fekete thought was the single most important metric to determine stress in the market. The second thing you need to do is put recent market action in historical context.

Firstly, lets review some historical stock levels for gold and silver for some key years - the 1980 peak, the 2001 bottom, 2012 and now. There is only one place I know that has that data going back that far, and it is www.sharelyxn.com. It is a lot easier to follow by looking at the charts of the stock levels, which are available for gold and silver if you have a subscription. If not, then just sign up for a free trial, it will be worth it just to see the charts I'm talking about.

The table below shows the average total (registered + eligible) COMEX stock in millions of ounces for each of those years.

Year Gold Silver
1980 3.5 80
2001 1.0 100
2012 11.0 140
Now 8.0 166

First thing to notice is that even after the big gold drop being talked about, the total gold stock is still massively up on the 2001 bottom and the 1980 bull market. Not surprisingly, given the behaviour of SLV's holdings, COMEX silver hasn't dropped.

However, the stock figure by itself doesn't tell us much, as how can we compare the 1980s with today when we have a much larger economy. The important metric is to compare stocks in relation to open interest. If stocks decline but open interest declines as well, then the stock drop is to be expected.

Thankfully Nick at Sharelynx calculates this for us - what he calls Owners per Ounce, or Stocks Cover and you can find the charts here. It is just open interest in ounces divided by stock in ounces. I like to invert it, which gives you a percentage indicating how much of the open interest is backed by stock, a sort of fractional reserves figure. The table below has those approximate figures I've eyeballed from Nick's charts.

Year Gold Silver
1980 13% 10%
2001 9% 28%
2012 26% 22%
Now 19% 21%

So even after that COMEX stock drop in gold, we still have a coverage ratio that is way above that which applied in the 1980 bull and which is not down much on 2012. The current coverage of around 20% also needs to be kept in context of the percentage of open interest which stands for delivery, which for gold and silver over the past five years averages between 2% to 4%. So it looks like COMEX has plenty of stock on a historical basis. It is when that percentage coverage gets a lot closer to the average standing for delivery rate that we can consider COMEX under stress and at risk of cash settlement. We aren't close, no matter how the much the pumper sites like to hype the recent stock declines.

And for those who will say what about if everyone stands for delivery, well consider that while most of the shorts don't have the metal, most of the longs don't have the cash. We know this because of all the talk about margin calls causing people to have to sell. Think about that - if they couldn't meet the margin calls, then it means they didn't have the money to stand for delivery.


  1. Ditto! Thanks also for the links to your write ups that answered some of my earlier questions.

    Would you care to express an opinion on the recent rate of change of either metric (i.e. cover ratio or absolute inventory) from a historical perspective?

    For instance is the JPM 65% inventory drop in 24hrs normal?

    Where do you think the metal is flowing: blank manufacturers, jewelry manufacturers or strong hands of individuals/entities that want to preserve wealth?

  2. If you think it merits it, could you comment on the facts in this article (ignore the flippant style) about apparent record JPM gold sales:
    Is this a case of gold disappearing from inventory, then reappearing, without physically relocating, as Louis Cypher at Screwtape notes can occur) or actual sales?

  3. Hi Bron-

    The table below shows the average total (registered + eligible) COMEX stock in millions of ounces for each of those years.

    I believe you mentioned in a previous post (I can't seem to find the quote) that both registered and eligible gold are in fact allocated gold and as such have corresponding certificates with serial numbers.

    I didn't sign up for the trial account, but looking at your chart and the 1980-2001 swing from 3.5 to 1 million ounces followed by the 2012 increase to 11 million ounces and a 3 million ounce drop since then, do I understand correctly there are no gold credits in those numbers and that is all verifiable physical?

    I don't doubt the numbers, I just want to be sure I understand the data.

  4. I think it's also important to compare the gold comex holds vs demand. China imported 850 tonnes of gold in 2012. So China imported the entire comex inventory in 4 months of last year. In 2001 central banks were selling gold. Not sure in 1980.

    So China can break the comex anytime they want. Obviously they don't want to do that as they want to accumulate as much gold as they can at lowest prices first.

  5. Bron I want to thank you for a breath of fresh air - as in some SANITY about gold and silver. Very helpful after reading too much King World News : ) So please keep up the great work here, it is much appreciated.

    Gregg Fosse

  6. What's left out of this analysis is a comparison of those who 'stand for delivery' today as opposed to those who 'stood for delivery' in 1980. If there's a sizable disparity, that obviously tends to diminish the argument that the risk of cash settlement for lack of metal is minimal. Additionally, it would appear that as time passes even more folks are 'standing for delivery', which tends to change the calculus even more.

  7. MkeB, I don't read too much into individual COMEX vault change as what drives that can depend on many factors (maybe JPM's COMEX vault was full of kilo bars which it could sell into Asia at good premiums).

    Where it is flowing I don't know, but all of those are effectively going to investors.

    Out of the woodwork - Screwtapefiles has a good post by Warren on how much of the GLD metal may be staying in the vault.

    Aaron - the COMEX requires all physical stocks to be reported, not paper ounces.

    Anon - the amount of stock held in the OTC market vaults in London and elsewhere would significantly exceed what COMEX reports.

    Unfortunately Nick's delivery stats only go back to 2006, so hard to say what the rate of OI that stood for delivery was in 1980, would certainly be an interesting figure to see if current 20% coverage ratio is enough for a real bull market.

  8. Hi Bron,

    Just discovered your blog and am enjoying it very much.

    I am newish to the gold world and still trying to get the terminology straight. My understanding based on floundering to date was as follows:

    Eligible gold held at the Comex is not in fact available for settlement of futures contracts but is being stored for non-dealer private parties (as effectively allocated?) who are paying for storage. Only registered gold is available for settlement purposes. To use your fractional reserve banking analogy, registered gold is analogous to bank base money reserves. Eligible gold is more analogous I would have thought to cash stored in safety deposit boxes, not money on deposit.

    Consequently,if I have the distinction between eligible and registered correct, wouldn't the correct way to calculate a Comex fractional reserve ratio be to divide registered by open interest? Or have I got this wrong?

  9. "if they couldn't meet the margin calls, then it means they didn't have the money to stand for delivery."

    Maybe they couldn't cover because the margin call was issued on the weekend when banks were closed? I believe that that extra margin must be provided within 24 hours of notification with no exceptions for non-business days.

  10. David,

    Yes eligible is not registered for delivery, but I have included it because the fact that the owners keep it in COMEX deliverable form and in COMEX warehouses means they have an eventual intent to sell it back into the futures market. If they took it off eligible there would be costs to get it accepted back as eligible.


    What you say proves my point. If there was any chance that longs were intending to stand for delivery they would not be running so close to margin and would have excess cash in their accounts.

    Note your margin call issue also applies to the shorts as well.

  11. Bron:

    Please correct me if I have this wrong, but as I understand it, margin works in opposite ways for holders of long and short COMEX positions.

    The Exchange sets the 'margin requirements' needed to initiate and then maintain a position (which they can change at any time, but usually provide some advance notice).

    If the price of a futures contract rises, then the shorts may have to deposit additional funds into their account in order to maintain their positions, whereas the longs can rest easy, counting their chickens before they hatch.

    If the price falls, then the situation is the opposite: the shorts are laughing in anticipation of banking their gains, whereas the longs despair as they see their margin deposits become inadequate relative to what they may be required to pay for their positions when they are closed.

    If the margin clerks calculate that existing margin deposits are inadequate to cover possible losses, either for the shorts or the longs, they can demand additional funds from the losers on short notice, and if it is not forthcoming, then they can close out the positions, imposing immediate loses for those on the wrong side of a trade.

    So, although both longs and shorts have to maintain margin reserves in their accounts, only one or the other will face a 'margin call' if the price goes against them

    Of course, if the Exchange suddenly raises the required amount of margin deposits needed to maintain positions, long or short, they can also inflict painful losses on anyone who doesn't have a surplus cushion in their margin account or cannot make an additional deposit in time.

    Apart from that, it is a zero sum game, and margin account balances only matter to the losers.


  12. David Stinson10 May, 2013 00:26

    Sorry for the late additional comment/question, but I am still having difficulty understanding the precise economic distinction between eligible and registered.

    They both meet the same delivery standard in terms of quality. The distinction is normally presented in terms of the extent to which one is available for settlement of futures contracts but the other is not. Initially, based on your discussion above and the distinction drawn by others elsewhere, I had assumed that registered was essentially available on demand (or something?) at current spot prices for purposes of making good on the contract when delivery was requested – a kind of liquidity or market-making supply. That interpretation is also the one given, FWIW, here : http://about.ag/futures.htm . Under that interpretation, the difference between eligible and registered is, in effect, the reservation price. The reservation price of the latter is whatever the current spot price is whereas the reservation price of the former is unknown and presumably higher than the current spot price. In a pinch, the eligible might well be available for sale but for higher than spot and not on demand (i.e., only with the agreement of the owner).

    However, then I came across this:

    “The registered category is the total pool of gold and silver available at any time to meet delivery requirements under expiring futures contracts or to establish initial futures contract positions through a transaction called exchange-for-physicals (I’ll explain this another time). It is important to realize, however, that many parties holding COMEX gold and silver in registered form have no intention of making their holdings available for delivery. By this I mean that such parties are neither (1) holding a short futures position against the warehouse receipt nor (2) willing to sell their registered metal (warehouse receipts) to a party with a short futures position. Indeed, a substantial portion of those holding registered metal would have acquired the COMEX warehouse receipts by holding long futures positions for delivery. In other words, these registered stocks are held for investment and not for commercial purposes.” (from: http://silveraxis.com/todayinsilver/2008/10/01/random-thoughts-about-a-random-market/)

    I have no idea whether the quote is an accurate description of the distinction but it implies that there really is no necessary difference between eligible and registered from a reservation price perspective and that neither is available for purchase by shorts on demand. In other words, both are available only on the case-by-case agreement of the owner at whatever their specific reservation price might be.

    So I am left wondering in what precise economic or commercial sense eligible and registered actually differ or in what fundamental sense one is more “available” for settlement than the other?

  13. I know Tom from silveraxis and would trust his description.

    My understanding is that registered just means the metal is ready and can be delivered into a short but does not necessarily mean it will. The fact that it is registered just gives an indication that it is likely it will be sold/delivered, there is an intention (otherwise why keep it registered).

    Eligible is just metal that could be sold, but the owner hasn't gone to the stage of registering it. It too has potential to be sold but maybe less likely as registered. If it was not likely to be sold and was being held for the long term one could argue that it would be taken out of COMEX warehouses and stored elsewhere.

    Registerd and eligible are just different categories of likeliness to be sold IMO.

  14. Your posts are very accurate and exact, providing information about Gold and other metals trading. I must say, you have got an admirer in me. Keep posting mate.