Comex inventory: why does registration collapse during deportation?

by SchiffGold 0 0

This analysis focuses on gold and silver within the Comex/CME futures exchange. See the article What is the Comex? for more details. The charts and tables below specifically analyze Comex stock/physical inventory data to show the physical movement of metal into and out of Comex vaults.

Registered = Mandate issued and can be used for Comex delivery, Eligible = No mandate attached – owner has not made it available for delivery.

Current trends

Gold and silver entered recently demotion in the cash market. While the futures market is still contango, the spot market has been consistently above the futures market. Usually this is a brief event that reverses quickly, but it has been going on for several weeks now. The graphs below show the average monthly difference between futures and spot contracts.

Figure: 1 Recent monthly change in inventories

Gold has been in the largest average reversal since September 2013, for silver it is July 2013. In the past, the reversal is usually caused by a large price difference that quickly reverses. The big move pulls the average down. It is rare to see prolonged periods like the one experienced this month. It is also important to note that the graph above shows that the backward movement does not necessarily mean that a price surge is coming. That being said, understanding movement can give clues to what’s going on below the surface.

Figure: 2 Recent monthly change in inventories

Reverse is rare in precious metals because it is an immediate arbitrage opportunity for traders. Anyone with physical metal can sell their metal at the spot price, then buy a futures contract at a lower price and hold it until delivery.

If spot gold is $1710 and August futures are $1705, a trader can execute this trade for an immediate profit of $5 per ounce (minus fees). It becomes even less likely that the curve will shift further because the storage cost saved should cover most of the other costs.

Thus, a forward market should see traders make their metal available for delivery and hedge their position by buying futures to bring the price back into contango. Comex data shows it’s exactly the opposite that happens.

Gold

After replenishing inventory for two months in March and April, Comex vaults have seen almost all of the increase in inventory reversed since May. The cut was both saved and eligible and is the biggest metal cut since the Reddit money crunch last year. Why is the metal leaving the vault when there is an easily profitable trade if investors delay delivery?

Figure: 3 Recent monthly change in inventories

As shown below, this is a very regular removal of arch metal. Registered has not seen any additions in the last 30 days and Eligible has seen additions only from Registered rather than new metals. This is metal that is no longer available for delivery. The relocation began at the beginning of July and the removal of Registered accelerated since then.

Figure: 4 Recent monthly change in inventories

Silver

The silver action is a bit more nuanced and potentially more meaningful. Although the chart below shows that the metal was added to the vault on a net basis, Registered saw a significant drop. This decline has lasted four consecutive months and seven of the last eight.

Figure: 5 Recent monthly change in inventories

The chart below shows the steady reduction in registered silver, with nearly 5.4 million ounces going from registered to eligible on July 12. This represents holders withdrawing their metal from the available delivery supply.

Figure: 6 Recent monthly change in inventories

In 2013, when the two metals were in reverse, gold saw its recorded stocks remain stable and silver saw steady increases. In 2015, the opposite happened and recorded stocks were running out. It should be noted that this marked a bottom in both metals.

The chart below summarizes movement activity over multiple timeframes to better demonstrate the magnitude of the current movement.

Gold

    • Over the past month, gold has seen Registered drop 7.5% or 1.5 million ounces
        • Combined with the release in Eligible, total inventory fell 6.1%, or 2.2 million ounces
        • Much of this happened in the past week, showing a acceleration
    • Inventory has decreased by 9% over the past year
    • Eligible down 6.3% and Eligible down 11%

Silver

    • Silver Registered is down 13.3% in the past month alone, after falling 11.7% last month
        • Registered money is down an incredible 44% in the last year and 56% over three years
        • This is metal that holders no longer want available for delivery
    • Eligible is positive over the past month (5.3%), resulting in an increase in total silver inventory of 1.4% or 4.5 million ounces

Even though the money is circulating in the Comex vaults, it is not available for delivery. Again, this is very counter-intuitive when the market has entered such a constant backwardness.

Figure: 7 Summary of inventory change

The following table presents the activity by bank/Holder. It details the figures above to see the movement specific to the vaults.

Gold

    • Each vault has had exits in the past week and month
    • Loomis and Malca both saw discounts of over 20%!
        • For Malca, the majority happened in the last week
    • JP Morgan has released over 770,000 ounces, half of it in the past week

Silver

    • Silver MoM shuffled with 3 chests added and 5 chests seeing exits
    • On a net basis, the movement was much smaller than some of the mixes between the chests
    • In the vaults, the movements were much more pronounced
        • Brinks lost 12.5% ​​or 5.5 million ounces
        • Loomis and Manfra both recorded releases over 1 million ounces
        • JP and CNT were the big adders with a combined total of 13.2 million ounces

Figure: 8 Detail of inventory variation

gold pledged (a subset of Registered), set a new record at 2.44 million ounces. Although Pledged is considered a subset of Registered, it cannot be made available for delivery without the Pledge being removed. Collateral represents the gold that has been given as collateral. Removing pledges from registrants in the table above would reduce total registrants by 12%.

Commitments have risen rapidly and dramatically since bottoming out in April. It has remained virtually stable since the market entered reverse.

Figure: 9 gold assets pledged

Historical perspective

Zooming out and looking at gold and silver inventory since 2014 shows the impact Covid has had on the Comex vaults. Gold had almost nothing in the recorded category before JP Morgan and Brinks added their London inventory with nearly 20 million ounces.

Since the replenishment, there has been a slow extraction of metal out of the vault. The March resupply effort is shown at far right. This movement has been completely negated by the flooding of metal out of the vault since May.

Figure: 10 eligible and saved histories

Silver saw a massive drop in Registered as % of total. After a recent peak in March of up to 27.2%, it has since fallen to 18.2%. This is the lowest ratio since February 2018 and shows the pressure on the recorded market. Although the vaults have not been cleared, much less money is available for delivery.

The sharp percentage drop recorded is very similar to what happened in 2015. This is when the market was last behind and also when the price bottomed out.

Figure: 11 Historical Eligible and Registered

Supply available for potential demand

As can be seen in the chart below, the ratio of open interest to total stock fell from over 8 to 1.6. In terms of record (available for delivery against open interest), the ratio has crashed from nosebleed levels (think November 2019 where 100% was delivery) to 2.93 in the last month. The decline was driven by lower inventories with an increase in open interest.

Figure: 12 Open interest to equity ratio

Coverage in silver is weaker than in gold with 11.98 open interest contracts for each available physical offer of registration (compared to 8.2 at the end of April). The ratio has been pushed higher by a recent increase in open interest, as well as the continued move out of the book.

Figure: 13 Open interest to equity ratio

Wrap

As mentioned, the backwardation does not necessarily mean that a price spike is coming. That being said, it is clear that the market is under stress. Prices are falling, but that’s not all. The physical metal leaves the vault despite a profitable trade to be had.

Later this week the Comex Countdown will be released. The Comex results showed a very weak market. Things have changed drastically in gold, with net deliveries of new contracts nearing record highs. Check out this report on Friday!

Another major data point to watch is the short position of speculators. The Commitment of Traders report shows that Managed Money lost money. Over the past week, gold has also gone long to short. Interestingly, this coincided with a drop in margin rates and an increase in open interest. This means that the increase in open interest was driven by short traders, not long traders. These short traders take advantage of lower margin rates to increase their leverage on the short side. This sets up very well for a possible short squeeze if the market starts to rebound.

In short, prices are down. However, there is clearly more to the story. Short speculators have driven the paper market lower, but the physical market is starting to diverge. Forwarding exists because traders keep their physical metal rather than making it available for delivery.

Additionally, traders who profit from arbitrage will want their physical back when contracts expire in the coming months. Specification shorts may be forced to physically deliver and may be difficult to source at current prices. This could cause a dramatic price rebound.

The data source: https://www.cmegroup.com/

Data Update: Daily around 3:00 p.m. EST

Last update: July 18, 2022

Gold and Silver interactive charts and graphs are still available on the Explore Finances dashboard: https://exploringfinance.shinyapps.io/goldsilver/

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