Sunday, February 2, 2014

COMEX February Gold Futures: First Notice Day for Settlement: 57% fewer contracts than last year.

57% Fewer February Contracts File Notice on First Notice Day

Last Friday, the fifth and last Friday of January the total open interest (OI) in gold futures on the COMEX was 375,065 contracts of which 5,905 filed for settlement during February.  Friday, January 31 was first notice day.  Last year, first notice day for the February contract was Thursday January 31.  13,910 contracts filed notice last year on first notice day.


I was expecting at least 7,500 contracts to file notice.  Total open interest has been about 10% less than in 2013.  Yet notices filed on first notice day are down 57%.  In addition, the number of Feb-2014 contracts filed is down 42% from Dec-2013.  On November 27, 2013 the first notice day for Dec-2013 contracts 10,157 contracts filed.  The bullion banks were able to convince a lot of Feb-2014 contract holders to roll over to future dated contracts.  

Still No Brave Entrepreneurs Trying to Squeeze the Shorts 
Shockingly no enterprising hedge fund manager has tried to stand for delivery of enough contracts to really squeeze the shorts at the COMEX.  An investment of $740M could have doubled the number of contracts standing/filed last Friday.  A large amount of demand would drive up prices given that the COMEX banks' vaults have only 439,900 ounces of registered gold in inventory.  Last year at this time inventory was 2,925,000 ounces.  Higher prices would pry eligible gold lose so that it could be registered.  

We're still waiting for the 21st century Hunt brothers.  Carlos Slim, George Soros, Putin, could easily come up with several $100M.  Perhaps gold is more dangerous than silver because it's reserve banks turf.  Look what happened to the US Presidents that started to break the power of the reserve banks over gold and the US dollar.

Contracts Typically Lost to Settlement Even After First Notice
Those who are short the 5,905 Feb-2014 contract have yet to cover.  They must cover or issue warrants for delivery by the end of the month unless they can convince the long to accept an equivalent, which might be future dated contracts, GLD shares, or even cash.  Therefore, even though 5,905 contracts filed notice much fewer contracts could be settled by the end of February.  For example, 3,664 of the 10,157 Dec-2013 contracts filed on first notice day were 'lost' to settlement during the month.

Registered Inventory Could Prove Enough to Cover February 
Current inventory of registered gold could be enough to cover settlements during February if roughly 1/3 of Feb-2014 contracts are lost during the month.  This is rough because multiple contract can be settled with the same gold/warrant during the month.  Also portion of registered gold must be in the hands of owners who are not shorts who have yet to cover.  

But Shorts Will Soon Need Inventory for March and especially April which is typically a big settlement month.  The amount of leverage in the system continues to impress.  A month ago total open interest was 384,219 contracts, of which 215,736 were Feb-2014 expiry.  At the moment, 5,905 contracts are settling a month old obligation of 215,736 - over 36:1 leverage.

Note: last Friday's data as reported by the COMEX is 'preliminary'.  I will update this post when the final data for Friday is available.  Typically the final numbers are only slightly different from the preliminary.


6 comments:

  1. can you explain what you mean by the following

    "At the moment, 5,905 contracts are settling a month old obligation of 215,736 - over 36:1 leverage."

    mikeyj80

    ReplyDelete
    Replies
    1. A month ago there were 215,736 contracts that could have been obligated in February to provide bullion to settle. Now there are only 5,905. Ultimately, by the end of February the contractual obligation as it stood a month ago will be satisfied with less than 590,500 ounces of bullion. So bullion is effectively 'levered' to support 36+ times more paper gold.

      Delete
  2. i think a more clrrect interpretation would be to look at total registered stocks to front month OI, probably best to use april at this point. Some also will inlude eligible in their comparisons and the arguments to do so make sense, but a matter of where you want your stake.

    The issue with basing it on current OI is that it is likely to drop even further, and even more, oi is just paper claims anyway, so you are basing paper leverage based on paper claims, not on any underlying physical asset.

    ReplyDelete
  3. Out pop the deliveries tonight, those combined with a likely reduction in OI should clean up half the outstanding contracts leaving only about 2k to settle. Note multiple issuers and one stopper (not jp)

    mikeyj80

    ReplyDelete
    Replies
    1. Mikey,
      Do you know what exactly 'customer' versus 'house' account means in the COMEX settlement reporting? I can't believe that JPM, for example actually owns the gold in the house account. More likely that they are custodians of that gold and trading it on behalf of customers. Whereas the customer category is gold that the customer his/her self owns and directs JPM to trade. Am I on the right track?

      Delete
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