More Deception About the COMEX

The title of this post is a play on this TF Metals Report post. In it TF claims that deposits into JPM's stocks as shown on recent CME Gold Stocks report "are bullshit. Either completely fabricated and falsified OR simple paper claims. It's one or the other due to the simple statistical improbability of three consecutive round numbers totaling exactly 10 metric tonnes."

He then concludes that "this eligible gold deception currently being employed by The Comex is just another indicator" of "the end of the fractional reserve bullion banking system is rapidly approaching. Keep stacking and prepare accordingly."

I find it interesting that even though TF thinks that "this latest move is so brazen in its audacity" and says that "since no one else is talking about it, maybe I'm just crazy", he doesn't think to qualify his analysis. No TF, you are not crazy, you just didn't bother to do any research before jumping to a conclusion.

On the first page of the CME's gold futures rulebook it says:

"Gold meeting all of the following specifications shall be deliverable in satisfaction of futures contract delivery obligations under this rule:

1. Either one (1) 100 troy ounce bar, or three (3) one (1) kilo bars. ...

6. Upon receipt of the gold bar by the Licensed Depository who must also qualify and be designated a Licensed Weighmaster for gold, each gold bar shall be weighed in the lot measured to 1/100 of a troy ounce (two decimal points)."

Since gold kilo bars are cast to exactly one kilo, they all weigh the same - 32.15075oz. Under point number 6 that is then rounded down to 32.15oz. So 32.15 x 6000 kilos (ie 6 tonnes) gives the "statistically improbable" 192,900.000oz that TF observes.

I would note that in the wholesale markets kilo bars (as well as 400oz bars) are usually sold in 1 tonne lots, so it also makes sense that movements occur in the 1 tonne lots that TF considers a suspicious sign.

So TF's conclusion in his post is wrong because he didn't bother to check that COMEX allows kilos bars and that every kilo bar is recorded as 32.15oz, which multiplies out to the exact ounce figures.

I would also note that unlike kilo bars 400oz bars (and I believe 100oz silver COMEX ones) are odd weight, ie bars can be + or - of the target weight within approved tolerances - it is done this way because it is cheaper than casting bars to an exact weight. This is usually done by measuring out granules to the weight before then putting them into a mould and melting them. 400oz/100oz bars are casting by pouring from a crucible and relies on the skill of the pourer to fill the mould as close as possible to the target weight.

I was surprised that TF would not know the rules of his own futures exchange and one that he analyses and comments on, but it seems that he is not alone, with others republishing TF's post approvingly - GATA, Jesse, Harvey Organ & Bill Holter, Silver Doctors, Brother John F to name a few.

I can see why that may be, as kilo bars are primarily a size in demand in the India/Asian region rather than the US, and most of the bars in COMEX I guess would be 100oz. I note that the rulebook specifies a minimum of 99.5% purity whereas kilo bars for the Asian market are generally demanded to 99.99% purity. As it costs more to make 99.99 than 99.5, a bullion bank isn't going to put 99.99 kilo bars into COMEX and may not be able to use 99.5 COMEX bars to meet Asian demand without re-refining. So we sort of have two separate kilobar markets.

The end result of the above facts is that kilo bars in COMEX I guess would rare. Therefore, TF was on to something when he saw kilo bar movements into COMEX, the problem is he got the analysis completely backwards.

If Asian demand is high and a bullion bank can get good premiums on 99.99 kilobars, they are going to ask refiners to turn all mine dore into 99.99 kilo bars. So if we see 99.5 bars going into COMEX then it may be an indicator that Asian demand has eased. Maybe JPM had commitments with refiners to buy their output for a period of time, and if Asian demand had eased then they may have just asked their refineries to make 99.5 (for all we know maybe those deliveries were 99.99 kilo bars) and they are just parking them in their COMEX warehouse, waiting for Asian demand to return.

This Tuesday report from Reuters confirms the theory: Asia Gold-Chinese prices at a discount on credit crunch fears:

"'The rise in borrowing costs in onshore China plays a crucial role. People don't want to keep the metal and they try to dump it to raise cash,' said one precious metals trader in Hong Kong. Another trader said there had not been a significant drop in demand but liquidation of stocks was taking its toll on prices."

So if you were a trader, TF's advice to "keep stacking" on the basis of the unusual CME delivery figures was actually backwards - it was possibly a sell signal.

TF should keep an eye on the CME reports - if there are movements of round ounce tonne lots, indicative of kilo bars, out of the warehouses then it may be an advance bullish signal of Asian demand returning.

Unfortunately, I don't think TF is listening as six days ago I left comments to his post explaining the above kilo bar issue and he has not made any correction to his clearly incorrect post. Maybe he thinks I'm just an "ardent Cartel apologist and disinfo agent". A pity, as round ounce tonne lot movements looks like a good trading signal - if only you know how to read it.

Correction Nov 5th: After a discussion about this post with TF (see here, here and keep scrolling) I would like to clarify that I didn't intend to mean that TF's "keep stacking" was trading advice. My intent was to say IF you were a trader then you may have read his post as bullish. TF also noted that he was not following the comments on the original post, hence he missed by comments, so it was not a case of not listening.

I will also give props to TF for publishing my comments, which is more than I can say for some bloggers who remove comments that are critical of them.