Gold Price Discovery II

COMEX revealed: Investigating the paper gold market

Since the gold price crash in April there has been wide debate about how the gold market works. Analysts have contrasted paper gold versus physical gold, urging that the different parts of the gold markets offer very different services to investors. Conspiracy theories have also abounded.

In our previous analysis we looked at the different parts of the gold market and found that the COMEX was still the beating heart of gold price discovery. COMEX still had greater volumes and numbers of bids and offers setting the gold price than the largest ETFs and physical suppliers.

When the gold price tumbled in April, it was the huge orders that had appeared on COMEX that were to blame. Hundreds of tonnes of gold were sold in seconds, knocking prices down dramatically. COMEX gold is once more in the spotlight.

For some gold commentators the way the gold price is set on COMEX distorts the gold market, meaning the gold price is often detached from actual gold bullion demand. These analysts argue that since it is mainly paper traded at COMEX and because small percentages of this paper gold can ever be delivered in physical form, COMEX is the flawed central part of setting gold prices.

Gold bullion being drained from COMEX

The recent decrease in inventories, particularly from the JPMorgan warehouse, has attracted much scrutiny of late. Discussion of a COMEX default and settling large gold contracts with cash, rather than gold, i.e. defaulting, continue to animate many a gold market discussion.

Notable investors, such as Eric Sprott, believe the odds of cash settlement occurring in the futures markets are ‘about 100%’.

In light of this we take a look at the health of COMEX and ask if it is close to breaking point.

Open Interest on COMEX reached a peak at the end of 2010 at 650,000. It has never reached similar levels since and at the time of writing many appear concerned that the overall open interest is continuing to fall.

However, looking at the graph below there does not appear to be a clear downward trend in activity on COMEX. Market participants appear happy to keep bringing their business to this exchange.

COMEX open interest


Let’s dig a little deeper into the open interest on COMEX to see what certain classes of market participants are up to.

The Commercials are famed for the bearish positions on gold, yet few seemed to have changed their positions on COMEX. Commercials short positions have even been fallen in 2013, whilst their long positions have been growing.COMEX futures participation

When we first began this study we wondered if we would find Commercial long and short positions to have declined. In truth, there has been very little change since activity peaked in mid-2011.

The graph above also doesn’t reveal any trends showing declining activity amongst Non-commercial market participants either. Their short positions have been rising of late, as they have been culling long positions.

Using the graph below, if we look at Commercial net positions, they have been getting less negative since the beginning of the year, whilst Non-commercial net positions are getting less positive. Neither class of market participant is showing uncharted behaviour in an example of withdrawing liquidity from COMEX.

COMEX net positions

What about physical gold in COMEX warehouses?

As we said in the introduction, the recent drawdown of gold stocks and the speed at which they have occurred has taken many by surprise and caused some alarm. But is there anything worrying occurring here?

COMEX registered gold stocks


Whilst stocks have been falling, registered ounces of gold ready to meet delivery of contractual positions, remain significantly higher than they were at the beginning of the gold bull market. However COMEX is now much larger market, with greater numbers of ounces represented in open interest. Falling stocks can represent an issue should open interest not be falling in a similar fashion – i.e. if there is more paper gold being traded with less ounces of physical backing it in the vaults.

The shortfall of gold stocks in relation to open interest has existed since 2009, previous to this registered gold stocks were either in surplus or the two tracked one another.

OI ounces versus registered ounces


This relatively new phenomenon is said to place COMEX under some stress, even if previously, the deficit has been far greater.

How much open interest is actually backed by physical gold?

To understand this we need to look at something called the cover ratio, which tells us what percentage of gold actually backs COMEX obligations.

By inverting Nick Laird’s Owners per Ounce calculation (as done by Bron Sucheki) we are given the cover ratio.

COMEX cover ratio


As we saw previously with when we assessed the registered gold stocks to open interest chart, the cover ratio is significantly lower than previously seen and has been declining since mid-2006. In May 2013, the cover ratio fell from 7.12% to 4.8%, its lowest level since August 2011. 2011 saw three consecutive delivery months where cover ratios were particularly low, meaning that current market action is notable but not unprecedented.

N.B. When measuring the cover ratio many analysts use the total gold stocks, registered and eligible together. Whilst aware that COMEX warehouse providers freely reclassify registered gold into eligible gold we have decided to assess the current coverage according to what is available for delivery now.

Another way to measure the sustainability of COMEX

Another key statistic to measure is the ratio of contracts standing for delivery versus open interest. This figure shows you percentage of traded paper gold is taken to delivery. We have to thank Nick Laird of ShareLynx for this data which would have been otherwise unobtainable.

COMEX delivery percentages

The highest peak of delivery at COMEX was back in 2006, when the ratio was nearly 11%. Since then other peaks seen have been around half of this. Since the beginning of the year the ratio of those taking delivery against open interest contracts has been declining.

So far this year the percentage of those taking delivery has been between 2-3%, small compared to peaks seen in June 2006 and more recently, December 2011. This would suggest, therefore that the drawdown of gold stocks and the fall in cover ratio is not the problem some have suggested it is.

We would guess that in order for COMEX to come under any stress then the delivery ratio would have to increase significantly. This could happen, but it would need notable changes in trading behaviour.

To examine this further we looked at the difference between the delivery ratio and the cover ratio, to establish if enough deliveries are occurring to drain registered gold stocks.

Despite inventory drawdowns, the small fall in open interest and delivery contracts means that the difference between the two ratios has remained relatively constant since the end of 2011.

COMEX delivery ratio minus cover ratio


As things currently stand, we would need the number of deliveries need to increase by over 250% to put COMEX under stress.

The stunning activity of JPMorgan

Whilst many COMEX participants have been withdrawing gold from warehouses, one member has taken it to another level recently. Gold analysts have been asking why this is and why this exchange member’s behaviour is so vastly different to others.

Take a look at the graph below to see how JPMorgan has been parting with a lot more gold between Dec 2012 and June 2013 than its nearest comparison points.

COMEX gold relinquished


The withdrawals are courtesy of both JP Morgan’s House and Client account.

JPMorgan house account

JPMorgan clients account


In March and April both saw significant withdrawals, however in other months shown neither withdraws significant amounts at the same time.

JP Morgan’s house account parted with giant amounts of gold in March and April 2013, whilst its clients appeared to then follow this lead with their subsequent behaviour. JPMorgan client have been handing over gold for four months in a row now.


Whilst there is little doubt that the amount of stock held in COMEX Warehouses has seen somewhat of a decline, this trend is in line with others exhibiting themselves in COMEX market data.

Whilst numbers of Open Interest have fallen slightly, market participation is not collapsing yet. At the same time, levels of Open Interest are not falling as rapidly as gold stocks, meaning this paper gold is becoming less tangibly backed by bullion. The cover ratio does not, as yet, appear to be at unprecedented low levels even if we should keep a close eye on it.

We also need to look out for the delivery ratio exceeding the cover ratio. Should this happen the amount of ounces being demanded for delivery will exceed the stock of registered gold ounces at COMEX.

Being a fractional market COMEX is vulnerable to runs, as banks are, but at this time COMEX continues to function and hold the liquidity monopoly in the gold markets accessible to Western investors.

As our last piece of gold market research found, COMEX is the heart of gold price discovery. An increase in the delivery ratio is not an impossibility given the current rush for gold by our Asian contemporaries and the unsteady macroeconomic situation. Therefore, in part III of this series we will take a further look into what might happen to gold price discovery should COMEX falter and huge volumes of bids and offers present themselves at other liquidity points in the gold market.

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.

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About the Author

Jan SkoylesJan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University in 2011 Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of media including BBC, Reuters, Wall Street Journal, Mail on Sunday, Forbes and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.View all posts by Jan Skoyles

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  • Confounded Interest

    Good stuff you two. I was beginning to think Bron Suscheki was the only level head left in this space. It’s comforting to see a favoured Max Keiser guest (Skoylesie) speak in even tones. 😉 Looking forward to some conclusions in the third instalment.

    Cheers … pb

    • janskoyles

      Thanks Confounded Interest! We were new to Bron’s work and grateful to you for bringing him to our attention. Look out for the soon to be released third instalment, newsletter subscribers will get a sneak preview!

  • Confounded Interest

    Oops… that’s Skoyles*y*

    • janskoyles

      Don’t worry!

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  • JerseyJoe

    Interesting read. Question: I see from your data on “Kilos of COMEX Gold Relinquished” that you include ABN AMRO, haven’t they publicly ceased delivering gold to clients? If gold is readily available from the COMEX, why would they resort to such unusual measures?

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  • JerseyJoe
    • Billy Bankers

      Great comments in the chain above and thanks for stopping by.

      It’s certainly true that throughout history the authorities have tended to manipulate gold and silver whenever they could. The London Gold Pool of the 1960s was a publically talked about means of intervention and Alan Greenspan’s hints and testimonies reveal much here too. In today’s giant Bernanke experiment, you might also say that the authorities have never had so much need/temptation to manipulate the precious metals markets. The burden of proof is 100% on the central planners to prove they’re not up to anything untoward here.

      However, even as gold investors deeply cynical about the financial system, the COMEX data we found appeared as we present it above. There need to be more traders requesting delivery to destabilise this fractional market. At the moment these speculators seem happy to play.

      That is not to say there are not questionable things going on behind the scenes, but the public data available to us didn’t reveal this. What might be going on behind the scenes is for another research piece.

      • JerseyJoe

        Fair enough Billy, but perhaps there is a broader pool of information that could be tapped to at least draw the “COMEX data” into question rather than presenting it as if it were the conclusive word on what is going on. After all, as you acknowledge, these commodities have been manipulated “throughout history”. Indeed wars have been fought over it – perhaps the most visible being the Opium War(s).

        I believe your report, which was insightful and interesting about the “COMEX data” (as they potentially/likely scripted it) would have more “fair and balanced” if it acknowledged the ABN AMRO announcement which clearly draws the “COMEX data” into serious question which revealed the obvious, if the gold is so readily available, why default on customer obligations?

        Beyond that, there is a wide array of other sources like the ones discussed here (linked below) about how the COMEX delivery data and the COMEX inventory data fail to match or the new disclaimer by the COMEX regarding the accuracy of the “COMEX data” which is quite an eye-opener.

        (LINK: Keiser interviews Alasdair Macleod:!t=12m59s )

        Here is the new COMEX disclaimer as reported:

        “The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only.”

        While your company’s report may pre-date the new COMEX disclaimer had you questioned the “COMEX data”, the arrival of this new disclaimer would have vindicated your suspicions/concerns that the data might now reflect reality.

        Unfortunately, at this point, this new disclaimer draws the entire report into question because COMEX admits it does not know if the “COMEX data” is accurate and is now distancing themselves from liability about conclusion drawn from the data. (Perhaps upon reading your report, COMEX realized they needed a disclaimer because they never thought anyone actually believe them in the first place. ???)

        Perhaps a revised report is in order, post disclaimer.

        • Billy Bankers

          Hi JerseyJoe, welcome back!

          You make some good points, the most important being the COMEX disclaimer. This is indeed concerning as it is like them saying ‘we don’t know what’s going on at our exchange’.

          I think you’ll like where our next deep research report is headed as it picks up on exactly such things as this disclaimer to ask what would happen without COMEX or the paper markets. We will be releasing this in a few weeks and I hope you enjoy it.

          • JerseyJoe

            Very cool – I look forward to it!

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  • Jeff

    “So far this year the percentage of those taking delivery has been between 2-3%”……This is were you miss the whole point. It IS NOT 2-3% standing for delivery. That in reality is all the Comex is settling. They are paying the other 97% in cash. Because the metal is not available (except bars with 100 other names on them)…..Why don’t you spend some time investigating why customers (and countries) around the world can’t get delivery. Clients who are offered cash in lieu of their purchased and stored gold……Please spend some time in your next article explaining why it takes 10 yrs for Germany to get a portion of their “stored” gold back. 10 yrs ? Really.

  • Tim

    Fantastic work!

  • Mephistopheles Lux

    Jan, do you think the libor rigging scandal is just a “conspiracy theory” too.

  • Bron Suchecki

    “… found that the COMEX was still the beating heart of gold price

    Not necessarily. Interestingly it seems to fluctuate between COMEX and London, see
    I think COMEX gets a lot of attention because it is visible, but just because the OTC fowards market is opaque, doesn’t mean it isn’t huge itself.

    • janskoyles

      Hi Bron, thanks so much for getting in touch and reading our piece. Your work on this previously helped us a great deal.

      Regarding the size of COMEX compared to London, I think this is perhaps something we should look into for our next set of research. The size, and the influence within, the gold market is certainly something that needs a lot of time and research dedicating to it.

      • xauphil

        A difficult estimate is working out what percentage of the global market is executed by speculative players versus players with a genuine underlying interest. One needs to consider the volume of EFP trades executed by non-US players and keep an eye on the LBMA movement as well. The total picture is indeed distorted and finding out the true picture of gold is going to be a matter for global regulation of commodity markets.

  • Neville Chambers

    Great research Jan and team,
    I’d be very interested to see the next write up you do on this.
    Keep it coming!
    Regards from Seattle.

    • janskoyles

      Thanks Neville! Glad you enjoyed it and really great to hear feedback.

      Sign up for our newsletter and you’ll be one of the first to see the next write up!

  • Bill197511

    Well said, Donald. The recent big price smash was obvious manipulation, nobody sells over four hundred tons of gold in two days. They shot themselves in the foot because the low price brought massive physical buying. That will result in more metal demanded at the COMEX, pushing up the paper price. The shorts will have to cover, and the gold and silver prices will soar. It should’nt be long now.

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  • adam

    Perhaps the JPMorgan gold position reflects the repatriation of German gold

  • rbblum

    The article was about the COMEX. . . . primarily a ‘paper market’. Right? And, not only are there a very few, select, primary participants who are drawing down the ‘physical gold’, the largest amount of ‘sells’ occur in the dead of the night with the fewest number of ‘potential buyers’ . . . which is the worst time to sell . . . unless the intent is to ‘manipulate’ the ‘paper gold market’ downward.

    Otherwise, the observation should be rather straight forward: Continual printing of paper money that is backed only by ‘trust’ of the western financial system and with no realistic future path to pay down, much less fully pay, sovereign debts of the west . . . while Russia, India and China are buying physical gold as if there is no tomorrow (to the western financial system).

    In any event, the question should be who is likely to come out of the current economic situation on terra firma: the west . . . or the east?

  • Rob

    Last para. : “COMEX is the heart of gold price discovery” !! ….You have a great sense of humour Jan.

  • Rob

    The question is how long can this PM market manipulation by corrupt and non-transparent western governments and banks go on for in a world which apparently increasingly tolerates it.

    The World Gold Council [ha ha], the PM mining industry, and the mainstream media [who treat recent massive take-downs as logical trends rather than crimes which ” Regulators ” -ha ha- purposefully ignore] remain silent when 1000’s of investors, who made a commonsense decision to protect their wealth based on their delusion of free markets, are being shafted in this process.

    The magnitude of recent take-downs has pursuaded many spectators previously ‘on the fence’ that manipulation preventing true price discovery is occurring and suggests either the increased desperation of those parties ultimately responsible for whatever reason or is merely an indication of the increasing confidence of the latter that nobody will do anything about it in a situation where the integrity and transparency of the ‘powers that be’ appear to be in a downward spiral.

    Ultimately of course PM ‘s will reach their true market value but will any of us older guys live long enough to see this?

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  • IR Smartt

    Awesome piece! Though I think the conspiracy stuff is a little out there.

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