Tuesday, January 7, 2014

COMEX Needs 50+% More Registered Gold for February

JP Morgan Stopped 96% of Notices in December 
10,157 December 2013 COMEX Gold future contracts stood for deliver on first notice day November 27th.  By December 30th, the end of the contract month 64% or 6,493 delivery notices were issued and stopped.  The remaining open interest was lost; possibly to cash settlements or rolled over to new, future dated contracts.  JP Morgan house account stopped 6,254 or 96% of the delivery notices.  Thus ownership of 625,400 ounces of gold in COMEX registered inventory was transferred to JP Morgan during December.  CME Group reporting shows that HSBC, Bank of Nova Scotia, and Jefferies Bache were the largest issuers.

For comparison, in December 2012 there were 3,253 delivery notices or 46% of the 6,999 contracts that stood for delivery on first notice day.  The bar charts below show how deliveries and lost contracts progressed each day of the December contract month.

JP Morgan Now Owns Most Registered COMEX Gold
COMEX registered gold inventory on November 27th was 590,817 ounces.  During the month 133,017 ounces were added from deposits and transfers from eligible category.  So the beginning balance plus additions totaled 723,834 ounces from which 649,300 were issued and stopped during December.  Since JP Morgan house account stopped 96%, it stands to reason that they now own most COMEX registered gold.

COMEX Registered Gold Inventory Roll Forward:
Beginning Balance 11/27/13         590,817
Deposits                                    93,917
Adjustments/transfers                 39,100
Withdraws                              (240,693)
Ending Balance 12/31/13            483,141

Is JP Morgan's recent acquisition of COMEX registered gold bullish for the precious metal?  It depends what JPM does with it.  JPM also stopped the majority of contracts in Dec 2012 and then apparently used the metal along with a lot of other gold to help smash prices in April, May, and June 2013.  JPM house account issued a net 14,575 contracts worth of gold in the first half of 2013.

COMEX registered gold inventory has been declining and is perhaps a less ambiguous bullish signal.  Inventory is down to 483k ounces from 591k at the beginning of December and down over 2.5M ounces from about a year ago.    http://jessescrossroadscafe.blogspot.com/2014/01/comex-warehouses-registered-inventory.html

Forecast Gold to Settle in February = 750,000 ounces
February is the next big delivery month for gold COMEX futures.  As of last Friday open interest for February contracts was 214,460 contracts which is 56% of total open interest.  A year ago total open interest was 11% higher and the open interest for February was 254,987 or 60% of total.  Ultimately 13,910 February 2013 contracts filed on first notice day, January 31, 2013.  If the same proportion files this February, 11,699 contracts will file notice.  And, if 64% of those hold out for delivery as in December 2013 about 7,500 contracts will stand for delivery of 750,000 ounces.  

Registered Gold Inventory is about 270,000 ounces Short for February
Since registered inventory is currently about 480k ounces, about 270,000 ounces must be added to registered inventory to satisfy estimated settlements during February.  This assumes that JPM house account which currently owns most of the registered gold issues or sells all its gold during February.  If there are other sellers that must issue gold for delivery they will need to add it to the registered category first, which would increase registered inventory that much more.

Eligible Gold Inventory is 7.4 million ounces 
Do not expect a delivery default.  Eligible gold can easily be converted to registered by attaching a warrant.  COMEX eligible gold inventory is currently about 7.4 million ounces or 15 times the amount of registered.  At what price would eligible gold owners sell?  Presumably these owners hold their gold as eligible instead of registered precisely because they do not want to sell it - at least in the short term.


The foregoing estimates assume that all issuances/stops during December were made with registered gold.  COMEX rules allow for "Exchange for Related Position (EFRP)".  So it is possible that settlements were made with cash, new futures contracts, and shares of GLD, for example.  Data regarding non-gold settlements is unavailable.


  1. This comment has been removed by the author.

  2. Note: EFPs only exchange ownership of contracts, they don't settle/deliver them http://silveraxis.com/todayinsilver/2009/07/30/exchange-of-futures-for-physical-efp-explained-part-one

    1. Bron, Thanks for your comment and help. I appreciate your blog and comments on other sites.
      Yes, transferring ownership (evidenced by warrants) is how gold is exchanged on the COMEX. I use the term settle regarding settling futures contracts after their first notice date. Contracts are settled by the seller issuing their warrants for registered gold and COMEX 'matching' and transferring the warrant to a buyer/stopper. Typically, during the delivery period some contracts are settled by other means, which I refer to as 'lost'.

      I think we are on the same page, so please give me more background on your comment/concern.

    2. My understanding is you can't settle by other means, only by transfer of warrant.

      You can do an EFP for GLD, but then someone else is now holding the futures contract, which still has to be settled by warranted gold.

    3. Thanks. I reviewed the rule book and it seems that I should have used the term 'liquidated' instead of 'settled'. Regardless of the terminology, the seller may satisfy their obligation with an 'Exchange for Related Position' instead of a warrant transfer. It is not clear if the seller can force an EFRP or whether the buyer must consent.

      From Chapter 113 of the CME Group Rule Book:
      113102.E. Termination of Trading
      No trades in Gold futures deliverable in the current month shall be made after the
      third last business day of that month. Any contracts remaining open after the last
      trade date must be either:
      (A) Settled by delivery which shall take place on any business day beginning on the
      first business day of the delivery month or any subsequent business day of the
      delivery month, but no later than the last business day of the delivery month.
      (B) Liquidated by means of a bona fide Exchange for Related Position (“EFRP”)
      pursuant to Rule 538. An EFRP is permitted in an expired futures contract until
      12:00 p.m. on the business day following termination of trading in the expired
      futures contract. An EFRP which establishes a futures position for either the
      buyer or the seller in an expired futures contract shall not be permitted following
      the termination of trading of an expired futures contract.

    4. Rik, to understand this well you really need to understand how hedging works, and that an EFRP transaction is used by hedgers to more effectively settle their risk. Again, I posted at Harveys site an example of how this could work. In my years trading commodities I have never done and EFP with a non-hedger. I would simply take care of my hedge position by either buying/selling the futures contracts.

      Since these are privately negotiated transactions, of which the EFRP just serves as the pricing mechanism, it is clear that neither the buyer or seller can 'force' it on someone. I can safely say that if you are trading futures, you will never encounter anyone wanting to do an EFP or and EFR with you unless you carry your contract past expiration date (i.e. you hold a Dec contract after Dec 31 trading).

      Repeat of how the EFP might work as that is easier to get one's head around (in my opinion). We know we have to be dealing with two hedgers. Let's say one is a miner in South America, the other is a refiner in South America. They each decide to use COMEX futures as a price hedge (but not a physical one!). The refiner buys to hedge his price, and at another time, the producer sells to lock in his price. Note, these transactions are most likely not with each other as the counterparts.

      The refiner now has a long (which in expiration represents gold in NYC), and the producer has a short (which in expiration represents an obligation to provide gold in NYC). Do either of these look like potential problems if carried to expiration?

      Mr Refiner calls up Mr Mine and says, Mr. Mine, I would gladly pay you COMEX spot price for your production, that way you don't have to ship it to NYC, and I don't have to go pick it up in NYC. Mr Mine says to Mr Refiner, well that sounds just peachy!

      Since the mine is short futures and the refiner is long, they need to do something to close out there positions as they will be entering a pure cash transaction (Refiner to pay a defined amount of currency for physical gold delivered to his refinery). To do this the long would have to sell, the short would have to buy... but rather than each go to the market to find a counterpart, they do an EFP... The long gives the short his futures position in Exchange For Physical gold delivered to his plant.

      Now neither has a futures position, they just have a cash contract.

      As the rules say, this transaction cannot be permitted once the futures contract has expired if it is going to create a new position for one or both parties (you can't buy/sell futures after expiration, therefore you can't do an EFP to create a net longer/shorter position in an expired contract).


  3. hi Rik -

    "Since JP Morgan house account stopped 96%, it stands to reason that they now own most COMEX registered gold. "

    that's not correct, Rik. I explained it on Bron's site today:


    as far as contracts "lost" during the month: the Dec contract still trades during December - if that's what you mean by "cash settlement" - traders can still close out positions... and this:

    "10,157 December 2013 COMEX Gold future contracts stood for deliver on first notice day November 27th."

    is another big "misnomer"/misconception... contracts don't "stand for delivery in the sense that longs decide... every short must either be delivered upon or bought back. the shorts are not surprised to wake up and see "OMG - all of these longs are "Standing for delivery"... if the shorts don't cover, the shorts are "Standing for delivery" in that sense.

    and Bron - if I'm long DEC Gold, I can do an EFP with you, who is short DEC gold, and "close" or "settle" the contract that way. I would guess this accounts for some of the "lost" contracts during the delivery month.

    otherwise, if I do the EFP with someone with no position, you are correct: the Dec contract will just be transferred to someone else.

    1. Rik, see my quote on Harvey's page with an EFP example.

    2. Thanks KD. I have read many of your posts on this subject and they were very helpful. From your posts and reading the CME rule book, it is clear that longs do not 'stand for delivery'. The nomenclature is misleading. Perhaps we should start using 'shorts not covered' since it is their obligation to settle/issue.

      I appreciate your comment about daily EFP/EFRP activity. I will check it out. It's getting late for me now.

  4. Just piggy backing a little, one additional misconception is that each delivery represents a dicrete new 1000oz of gold. WIth December being a notable exception, it is very common to seem the same gold settle multiple contracts in a single contracts expiration... I.e. 1000 oz can easily settle 3 contracts (or more). I deliver to Rik (one contract settled) Rik delivers this same contract to KD (two contracts settled) KD delivers to Bron (three contracts settled) etc etc etc

    1. If I am following, December is the notable exception because one account, the JPM-house account stopped almost all the Dec-13 contract settlements. Right?
      Good point. JPM may not dominate the settlement activity in February. In 2013 JPM was 60%, 95%, 83%, and 97% of the activity in Feb, Mar, Apr, and May, respectively. In contrast to Dec, JPM was an issuer during those months.

    2. Correct. If you still have the data, look to see who both stopped and issued in the same month. That represents at least one contract that is likely being settled multiple times. It is not uncommon to see people apparently stop 'by accident' and then reissue the same amount the very next day.

    3. Thursday, January 9, 2014
      Comex Gold Inventory: Do You Really Trust The Banks?

      "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." - The disclaimer now posted on the Comex gold and silver daily warehouse stock report as of Monday, June 3, 2013.

      How would you like to get your bank statement in the mail from JP Morgan or Bank of America and see this disclaimer added at the bottom: "The information in this account statement is taken from sources believed to be reliable; however, JP Morgan Chase & Co. disclaims all liability whatsoever with regard to its accuracy or completeness. This account statement is produced for information purposes only." What would go through your mind if that was stamped clearly on your next account statement?

      The CME "believes" the inventory reports are "reliable" but will not back up the accuracy. Do you trust those numbers? Before you answer that question, keep in mind that the big banks have already been accused and successfully prosecuted for reporting and business fraud in several other areas of their operations. Also keep in mind that the numbers produced by the CME on a daily basis come from reports generated by the banks themselves. The numbers ARE NOT subjected to the scrutiny of any regular independent physical audit.

    4. Dig a little deeper. Hint, Section 703.B rules 5d and 5g

    5. This comment has been removed by the author.

    6. http://www.cmegroup.com/rulebook/NYMEX/1/7.pdf

      d. Annual Inventory Audit. Each Licensed Facility, at its sole cost and expense, shall have conducted by an independent auditor an annual audit which shall be in compliance with the procedures established by the Exchange. Each audit report shall be filed with the Exchange within thirty days of the date of the completion of the audit.

      However I'm not so sure about the reliability of the spreadsheet report that the CME puts out. I will post if I can confirm this, I see some irregularities that I want to investigate.

    7. Bron, curious what inconsistencies you notice?

    8. SEC Official Sounds Alarm on Decline in ‘Material Weaknesses’

      Public companies are disclosing fewer missteps in their internal controls over financial reporting. But it could be that they just aren’t looking hard enough, a securities regulator said on Thursday.

      The number of companies and their auditors reporting so-called “material weaknesses” over their internal control systems that work to prevent fraud and misstatements at public companies has declined precipitously over the past few years.

      “There are likely more material weaknesses in the system than are being reported,” says Brian Croteau, a deputy chief accountant in the Securities and Exchange Commission’s Office of the Chief Accountant.

      Companies were required to begin testing for material weaknesses under the Sarbanes-Oxley Act of 2002 and have their auditors attest to their effectiveness. In the first year after the rule took effect, auditors reported some 629 material weaknesses, such as a failure in oversight over cash management or receivables, according to Audit Analytics. But that figure has declined every year since, and only 141 were reported in 2011.

      When companies report material weaknesses today, Mr. Croteau said, they are generally accompanied by disclosures of material misstatements or restatements in financial results. That could indicate companies are not testing their controls properly or early enough to detect problems before they get out of hand.

      Financial errors should not be “a precursor to there being a material weakness,” Mr. Croteau told the audience at a Baruch College auditing conference in New York.

      A possible lack of rigor around material weakness testing appears to be showing up both in regular corporate correspondence with the SEC’s Division of Corporation Finance and auditor inspections by the Public Company Accounting Oversight Board.

      The PCAOB sent out an alert in October about the need to improve auditing around internal controls, after its latest round of inspections found that in 15% of the 309 audits it examined, auditors failed to get enough evidence to support their opinions.

      To be sure, many of the companies that first disclosed material weaknesses have implemented improvements to fix earlier problems and improved their effectiveness in controls over the years. But regulators, like Mr. Croteau, are unconvinced that companies are really experiencing so few weaknesses.

      “This is an area that needs continued attention and perhaps more attention than it is getting today,” Mr. Croteau said.

      Write to Emily Chasan at emily.chasan@wsj.com,follow her on Twitter @echasan


      Archive for the ‘The Case Against The Auditors’ Category
      I talk about Deloitte’s growing resemblance to Arthur Andersen before the Enron failure.


      about those "clean"?audits...

      like she says,

      “Sed, quis custodiet ipsos custodes?”

    9. Let's keep the arguments straight.

      You said:
      "The numbers ARE NOT subjected to the scrutiny of any regular independent physical audit."

      100% false. I ran a warehouse regular for delivery of CME products, pop in and annual inspections happened. It did at my peers as well. Unless of course I am lying to you.

      Summary of your second post:
      Don't believe all the earnings reports you see, or more simply, don't believe everything you read.

      That is sage advice. You might have done well to have thought about that before making your first claim.


  5. mikeyj80,

    On data feed of receipts, withdrawals and adjustments, they don't add up to separate data feed of stock balance, seems to be days with figures carried over from previous day. Need to double check to see if problem at data feed source or what CME gives data feed source.

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