Monday, October 7, 2013

COMEX Gold has 48 Owners per Ounce, Jesse

Analysis of open interest and warehouse inventory on the COMEX for gold and silver:

Each ounce of registered silver in COMEX inventory has 13 owners.
Each ounce of registered gold in COMEX inventory has 48 owners.

The COMEX has entered contracts with various buyer and sellers of gold and silver.  In summary these contracts exchange metal at a future date for cash now.  The total of all ounces that are under contract is called 'open interest.'  If all contract holders were to demand physical deliver or settlement when their contract expires, the COMEX would currently need 48 times as much physical gold to avoid a delivery default.  This would be similar to a run on a bank.  Banks do not have all their depositors cash on hand.  And, if all depositors insisted on withdrawing their cash at the same time the bank would be caught short.

As you can see from the charts in Jesse's post, historically the COMEX has kept only a fraction of physical metal in inventory to support multiples of contracts.  Currently gold's ratio of 48 is extremely high.

Contract holders typically settle for cash because they do not want to store the physical metal and they probably need cash to pay margin debt that they took on to invest in COMEX contracts in the first place.  With 48 owners per ounce, if more than 2.1% of contract holders stand for physical delivery the COMEX will delivery default.

In a delivery default the COMEX can force the contract holder to accept cash for settlement.   It is not clear what price per ounce would be used to cash settle.   A delivery default would likely send the price of physical gold sky-rocketing.  I suspect that the COMEX would cash settle at a pre-lift-off price.


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