Over the past few years there has been a lot of irrational fear-mongering
within the gold commentariat regarding the potential for the Comex to default
due to having insufficient physical gold in its coffers. I most recently
addressed this topic in a post on 6th May.
I’m not going to repeat all the information contained in earlier posts
such as the one linked above. However, here’s a very brief recap:
1) The ratio of Comex Open Interest (OI) to “Registered” gold inventory
that Zero Hedge et al employed to create the impression of high default risk
was not, in any way, shape or form, a valid indicator of such risk.
2) The amount of gold available for delivery at any time is the TOTAL
amount of gold in the “Registered” and “Eligible” categories, not just the
amount of “Registered” gold, since it is a quick and easy process to convert
between “Eligible” and “Registered”.
3) The maximum amount of gold that can be demanded for delivery is the
amount of OI in the nearest futures contract, not the total OI across all
futures contracts.
In the above-linked post I included a chart showing that the amount of
gold delivered to futures ‘longs’ over the preceding two years was much less
in both absolute and relative terms than at any other time over the past
decade. The chart made it clear that as the gold price fell, the desire of
futures traders to ‘stop’ a contract and take delivery of physical gold also
fell.
This meant that the unusually-small amount of gold in the “Registered”
category was almost certainly related to an unusually-low desire on the part
of futures ‘longs’ to take delivery. To put it another way, the
unusually-small amount of gold in the “Registered” category was nothing more
than a natural consequence of bearish sentiment.
Here was my conclusion at that time:
“It’s a good bet that if a multi-year gold rally began last December
(I think it did) then the desire to take delivery will increase over the next
couple of years, prompting a larger amount of gold to be held in the
Registered category.”
Finally, here are charts from goldchartsrus.com showing that this year’s strength in
the gold price led to 1) an increase in the desire of futures ‘longs’ to take
delivery and 2) a related and substantial increase in the amount of
“Registered” gold.
Exactly as expected.