A reader asked for some information on Comex warehouse stocks, open
interest and deliveries, which is timely as for gold we are currently in a
very unusual phase historically. First, warehouse stocks (all charts from
Nick at Sharelynx.com).
Over the past two years we have seen inventories building but the standout
feature is the reduction in registered stocks, both in ounces and as a
percentage of total stocks for gold. When we divide open interest by
registered stocks the unusual nature becomes more clear.
For gold, ignoring the temporary spikes, we are at historically high
owners per ounce, or if you want to convert the 85.455 into a percentage,
only 1.2% of open interest is covered by gold in the warehouses. For silver
we are at elevated levels, but nothing as dramatic.
As gold’s open interest has been relatively stable over the past few years
at around 40 million ounces the decline in “coverage” is entirely due to the drop
in registered stocks. For silver, open interest has increased from 500
million ounces at the beginning of 2012 to close to 1000 million today but
registered stocks have also almost doubled over that time to 60 million
ounces, hence we don’t see much change in silver’s “coverage” ratio.
When gold first moved into these very high owners per ounce figures there
was a lot of chatter about the potential or certainty of failed settlement
and Comex default. At the time, I noted that such commentary was ignoring eligible
inventory and the fact that such inventory can be converted to registered
relatively quickly. After two years of low coverage rates and no Comex
default, one would have to consider eligible to be relevant and when you look
at owners per ounce for total warehouse stocks, you get a very different
picture.
The chart shows that owners per ounce for gold has been stable between
4-6 and is currently 4.9, or a coverage ratio of 20.5%.
Another thing that has to be considered when looking at Comex warehouse
stocks is the actual percentage that stand for delivery. The charts below
show cumulative deliveries made each month versus open interest.
For gold we can see that it used to range between 2-4% taking delivery but
in mid 2013 around when registered inventory declined, we can see that the
delivery rate does not exceed 2% and is historically quite low.
So even if you want to ignore total stocks of 9.1 million ounces versus
44.6 million ounces of open interest and just focus on 0.522 million ounces
of registered stock versus the 44.6, that coverage ratio of 1.2% is well
within current delivery rates, with plenty of metal in eligible stocks
potentially available.
I would note that the decline in registered gold stocks and delivery rates
occurred soon after gold’s dramatic crash through $1550 and into the 1300s,
and the stocks and rates have stayed low since then during the subsequent
weak/sideways gold price phase we are currently in. A reflection of
lacklustre western investor interest in gold? However, I note that eligible
inventories have increased from 6 million ounces at the time of that price
drop to 8.5 million ounces today, and such accumulation has usually been
considered an indicator of positive western investor sentiment to gold.
I don’t have an answer at this stage as I hadn’t noticed this discrepancy
until delving into the figures for this post but it is another sign of
the exceptional state of the current gold and silver markets, which in my
opinion hasn’t been this pessimistic since 1999 when gold was pushing $250.
If ever there was a contrarian trade …
