Tuesday, December 17, 2013

COMEX Gold Futures Settlement Activity - 200k more ounces, 5X more than last year

2,076 Dec-13 gold future contracts remain as open interest waiting to be settled as of Monday December 16th.  This remaining amount is down from first notice day when 10,157 contracts were filed on November 27, 2013.  

Each contract is for 100 ounces of gold so 207,600 ounces must still be settled from registered inventory which currently sits at 604,944 ounces.  Settling the remaining ounces may not be as straight forward as it first appears.  No doubt the COMEX and its bullion banks will pull it off.  But, the degree of difficulty is increasing, especially compared to last year.

JP Morgan's House Account probably already owns most of the registered gold in inventory.  Since the beginning of this contract month when there were 590,817 registered ounces in inventory, JPM has stopped or taken delivery of 493,500 ounces.  When taking delivery JPM receives a warrant that is title to the registered ounces.  The issuer or seller transfers ownership of registered gold already in inventory to JPM via the warrant.  In this way ownership of existing registered inventory is transferred and inventory balances are not affected.  So had there been no deposits or withdraws to/from registered inventory this month to date and if JPM owned no registered gold at the beginning of the month, JPM would now own 84% of the registered inventory.  That would leave only 16% or about 97k ounces for all other firms.  

JPM has stopped 95+% of notices month to date, so JPM probably does not have short positions that would require issuing gold before year end.  In that case, other firms will be the issuers of the remaining 2,076 contracts.  And, yet they have an estimate 97k ounces of registered gold.  Tilt!  There have, however been some deposits and withdraws to/from registered inventory, so they probably have it covered this month.  Don't expect a delivery default this year.  Too bad COMEX reporting is not more detailed!

Settling the Dec 2012 contracts was much easier.  First, there was over 2.5M ounces or registered gold inventory at the end of November 2012 over 4 times the amount this year.  Second, only 6,999 contracts were filed on first notice day which is about 30% less than for Dec 2013.  Finally, 3,862 contracts were lost in the first week after first notice day compared to 3,463 lost contracts so far this December. So in the end 3,253 delivery notices were filed in 2012 while in 2013 4,614 have been filed so far and there are another 2,076 to go.  Note that last year and so far this year very few contracts were lost after the first week.

The term lost is borrowed from Harvey Organ.  It refers to a contract that filed for delivery during the notice period but then did not stand for delivery.  Lost contracts are presumably settled another way, possibly with a further-out futures contract, cash, eligible gold, GLD or some other exchange for related position (EFRP).

This December has been much more challenging for COMEX to settle all contracts as evidence by the large amount of open interest remaining this late in the month.  They will pull it off this month.  The next big contract month is February which currently has 231,910 contracts open interest, which is comparable to the open interest for December contracts a month ahead of time.  Expect to see significant additions to registered inventory before the end of February.  


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  3. This is one of the best explanations/reditions of depleting COMEX inventories I have seen. Those two graphs really bring the point home. Green or ''lost'' I presume to generally be contracts rolled over into future months. Nice one.

    1. Thanks. Getting the data was laborious. It would be nice if daily historical data was easily accessible. It would also be nice if we could see registered inventory by owner rather than by vault/custodian.

      Rolling over contracts is the most popular explanation for "lost" standing contracts. Clearly this is how Open Interest is managed down from 150+k contracts just 2 weeks before to only 10k contracts on first notice day. But, why would a contract owner stand for delivery on first notice day and then accept a new futures contract? Something else is going on. Here are a couple theories 1) long contracts owners are able to extract a higher premium to settle without physical after standing for delivery because of their clear and present danger.
      2) long contracts owners settle for a "related position" instead of registered gold. Perhaps GLD shares are used as related positions and then redeemed, which would explain why GLD inventory has been dropping.

      While preparing this post I read much of the CME Group's rulebook for gold futures and delivery. I will post about that soon.

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