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.  

Fraud at Commodity Exchanges - International Edition

Fraud seems to be standard operating procedure at commodity exchanges around the world.  First let's go to England where the London Metal Exchange (LME) is "under fire"

"Without doubt, the main focus of most market participants will be the London Metal Exchange’s review of its under-fire warehousing system. . . . . Together with several warehouse owners, the exchange is at the sharp end of regulatory scrutiny and legal action for long wait times to deliver physical metal."http://www.ft.com/intl/cms/s/0/33684eb0-2ec5-11e3-be22-00144feab7de.html#axzz2h390mI7r

Moving on to India.  The National Spot Exchange Limited (NSEL) is under investigation by the Economic Offences Wing (EOW) of the Mumbai Police

". . . it emerged that clients of the brokers had been allowed to take out unregulated longer-term forward contracts, rather than spot contracts in commodities such as sugar and wheat, the type of physical trade that the bourse was established to handle. As a result, questions arose over whether there was actual delivery of the commodities that were being traded."  http://www.ft.com/intl/cms/s/0/e2b9ef74-08c1-11e3-ad07-00144feabdc0.html#axzz2h390mI7r

 "Sinha, who is leading the EOW probe, admitted that in scale this was the largest he had handled so far. He added his prime objective was monetisation of the assets and tracing the money trail. But, he declined to dwell on the progress the probe had made on these fronts. The investigations so far by the Mumbai EoW have led them to offices and warehouses in 52 cities across 16 states and were conducted by 210 officers and 260 men."  http://economictimes.indiatimes.com/markets/stocks/market-news/some-nsel-brokers-may-face-criminal-charges-says-economic-offence-wing/articleshow/23617510.cms

"During the raids, it has emerged that 30 of the about 60 warehouses our teams raided were found to be empty. This indicates that certain traders allegedly connived with the NSEL officials and did not deposit physical stocks in the warehouses for money they received from the investors," the official told PTI.

"Another shocking thing is that four warehouses did not even exist, though they appear on documents seized from the NSEL and others," the official added.http://economictimes.indiatimes.com/markets/stocks/market-news/Economic-Offences-Wing-finds-half-of-NSEL-warehouses-empty/articleshow/23533792.cms

Gold and silver bullion e-series contracts caught up in NSEL investigation:

"MUMBAI: Bombay High Court today said it would pass order on October 7 on whether the settlement of e-series bullion contracts at the troubled National Spot Exchange Ltd (NSEL) should be aggregated with that of the paired contracts being overseen by the Forward Markets Commission."

"NSEL counsel said e-series bullion contracts involved 800 kgs of gold and 43 million tonnes of silver, estimated to be worth Rs 525 crores."
http://economictimes.indiatimes.com/markets/stocks/market-news/high-court-to-give-ruling-on-nsel-bullion-settlement-on-october-7/articleshow/23532733.cms?intenttarget=no

43 million tonnes of silver must be a miss print.  For comparison, silver open interest on the COMEX is about 18,000 tonnes.  Gold trading is probably minimal give recent severe government restrictions on gold importation.  

In the US, fraud is more sophisticated, as this example exposed by the NT Times shows:

"The Commodity Futures Trading Commission has issued subpoenas to Goldman and owners of other major warehouses as part of its inquiry into irregularities in the aluminum market that are believed to have cost consumers billions of dollars since 2010.""The subpoenas seek all internal documents, e-mails, correspondence, voice recordings and other records concerning the warehouse operations dating back to January 2010, according to two people familiar with the documents. The subpoenas also demand documents and correspondence regarding the London Metals Exchange, a private trade association that regulates warehousing. The subpoenas indicate that the federal inquiry has 30 “areas of interest.”"http://www.nytimes.com/2013/08/13/business/us-subpoenas-goldman-in-inquiry-of-aluminum-warehouses.html

Interestingly, a couple months ago JP Morgan announced that its commodity business is for sale.  The risk of fines must outweigh the profits.  http://online.wsj.com/article/SB10001424127887323608504579022852576701892.html