COMEX February Gold Futures: Countdown to First Notice Day for Settlement (update Jan 19)

COMEX Needs Much More Registered Gold For February

This February will be a very exciting month at the COMEX.  In February 2012 13,910 contracts filed notice on first notice day and 13,063 contracts ultimately settled with 1,306,300 ounces of gold.  Although open interest is about 15% lower this year than last, February should still prove to be a very exciting month because the COMEX has only 370,137 registered ounce of gold in inventory as of Thursday January 18th.  At this time last year, registered inventory was 2,276,000 ounces.

Eligible Inventory Available for Registered - At What Price?

COMEX has over 7 million ounces of eligible gold in inventory that can be quickly converted to registered by creating a warrant.  Eligible gold owners will be able to demand higher prices for their gold.  This is very bullish for physical gold.  Although paper gold prices are another story and may not immediately react.

My first post on this topic has a bit more background:

http://rikgreeninvestorforum.blogspot.com/2014/01/comex-february-gold-futures-countdown.html

OI for February Contracts down 17% from Huge Last Year

Last Friday, the third Friday of January the total open interest (OI) in gold futures on the COMEX was 415,680 contracts of which 155,185 were for February expiry.  Total OI is down about 8% from this time last year and OI in February contracts is down about 17%.  Although the amount of February contracts is a bit lower the trend in January with 12 trading days behind us is following that of last year.  OI has been 10-15% less than prior year for the last several months, at least which is as long as I have been closely tracking the data.

COMEX February Gold Futures: Countdown to First Notice Day for Settlement

February OI Down 15% from 2013
Last Friday, the second Friday of January the total open interest (OI) in gold futures on the COMEX was 406,327 contracts of which 183,466 were for February expiry.  Total OI is down about 8% from this time last year and OI in February contracts is down about 15%.  Although the amount of February contracts is a bit lower the trend in January with only 7 trading days behind us is following that of last year.





15% Less Than Last Year is Still Huge
Last year a massive 13,910 contracts filed notice on first notice day, which was the last Thursday in January.  First notice day for Feb-2014 contracts is Thursday, January 30th.  My forecast is for 7,500 contracts to file notice.  

I should clarify, as KD commented on one of my earlier posts, that the term 'filing notices' is a bit misleading.  Longs do not decide to file.  Effectively, all contracts that expire during the contract month that have not been covered as of the first notice date are filed.  The seller or short is in control as they decide when to cover.  Of course, longs and owners of gold decide the price.

More Registered Gold Needed for February Deliveries
Typically, some contracts that file are ultimately settled without delivery or 'lost' to the delivery process.  Last February 7% were lost.  So even if 7,500 contracts file, deliveries will probably be less.  The COMEX currently has 416,563 ounces of registered gold in inventory.  There are almost 7.8 million ounces of eligible gold in COMEX inventory which is readily transferrable to registered by attaching a warrant.  Therefore do not expect a delivery default at the COMEX.  Eligible gold owners may demand a higher price, but the gold is available and ready for settlement.

Another clarification: the terms delivery and settlement are used to denote transfer of ownership, which at the COMEX is effected by transferring warrants.  Ownership of gold is evidenced by warrants.  Registered gold has a warrant attached.  Eligible gold does not. Warrant transfers are used to deliver or settle contracts so that physical movement of bullion is not necessary.

COMEX Monthly Gold Delivery Dominated by JP Morgan in 2013

JP Morgan accounted for most of the delivery activity in most months of 2013.  During the first half of 2013 JPM was on the issue side of the activity.  Both sides of a delivery, issuing (delivering) and stopping (receiving) are reported by the COMEX.  The number of deliveries or contracts stopped/issued is represented by the yellow bars in the chart below.  

January is a slow month for futures contracts and therefore for delivery notices.  Only 224 contracts remained to be settled on first notice day at the beginning of this January.  

February is a big month!  I am forecasting that at least 7,500 contracts will need to be settled this February, which is significantly less than in February 2013.  I am guessing that the number of Feb settlements will be lower than last year because: 1) total open interest and open interest in February contracts is about 10% and 15% lower, respectively than at this time last year  2) more contracts settled in December than the year before which may have satisfied or pulled forward some demand for physical  3) COMEX registered gold inventory is low and the COMEX banks will entice more Feb contract holders to roll over to a future month.  Currently, COMEX gold inventory is about 417k ounces in registered and 7,361k ounces in eligible.  Also, my forecast is conservative because utilizing historical ratios is risky in volatile situations.  But, it's all I've got.

I learned from commentor Mick that the same gold/warrants may be used to settle multiple contracts in a given month because the same firm can stop and then issue the same warrant.  So to the extent that stops and issues by the same firm are netted together the same gold can be used to settle multiple contracts.  By reviewing the monthly CME delivery notice report for 2013, the average number of contracts that are stopped and issued by the same firm in a typical month is about 15% of the total volume.  

If 7,500 contracts need to be settled during February, COMEX will need more registered gold.  Let's say about 300k ounces more, at least.  The gold is readily available in eligible inventory.  But at what price?  

Data for JPM notices in the chart above includes both the JPM customer and JPM  house accounts.  The table below shows data for those accounts individually.

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.

http://www.cmegroup.com/trading/metals/precious/gold_quotes_volume_voi.html

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.

Rik Green Investor Forum Growth Portfolio down 1% in December and 17% in 2013

The growth Port-faux-lio lost 0.8% of its value in December while the S&P 500 gain 2.4%.  Gold was down 4.1% and silver was down 2.6% during the month and all the Port-faux-lios precious metals related investments lost a similar amount.  CVX saved the monthly results and was up 2.7% including dividends.  CVX is 42% of the port-faux-lios value.

Good thing that I held off rotating more CVX to precious metals last month.

Year to date the Port-faux-lio lost 17.2% while the S&P gained 30%.  CVX gained 20% including dividends.  PHYS was down 30% and the miners and silver funds were down about 40%.  A terrible year.  At least 2014 is off to a good start.

US Mint Coin Sales: Record Silver up 26%. Gold up 24% from 2012.

US Mint sales of Gold Eagle and Buffalo coins in 2013 were 24% more than 2012 and less than sales in 2009, 2010 and 2011.  

Gold coin sales were much lower in the second half of 2013 than during the first six months of the year.  Declining prices during the first half of 2013 stimulated demand.

US Mint sales of Silver Eagles set a record in 2013 and were 26% higher than in 2012.  

Gold coin sales in 2013 totaled 1,095,500 ounces which equals 34 tonnes.  As comparison, annual global gold mining output is about 2,700 tonnes.  Daily COMEX trading volume of gold futures is typically over 150,000 contracts with a value of 100 ounces per contract or 15 million ounces.

Silver Eagle sales in 2013 totaled 42,675,000 ounces which equals 1,327 tonnes.  Annual global silver mining production is about 24,000 tonnes.  Daily COMEX trading volume of silver futures is about 50,000 contracts with a value of 5,000 ounces per contract or 250 million ounces.

GLD Inventory of Gold Drops Below 800 Tonnes, a five year low, when Gold was less than $1,000/ounce

I finally found some time to look at GLD and SLV exchange traded plans (ETP) inventory and price history.

Gold inventory at GLD fell to just below 800 tonnes in the last days of December 2013.  The last time GLD has 800 or fewer tonnes of gold was in December 2008 when the price of gold was $780 per ounce.  In 2008, the gold bull market was strengthening which eventually pushed prices over $1,800.  2013 is the reverse.  Gold buyers are so bearish that they wish to own only 800 tonnes even with the price at $1,200.

Remember only Authorized Participants (AP) in GLD, such as HSBC, Goldman, JP Morgan, Scotia, Deutsche, Citi, and UBS are allowed to create or redeem baskets of 100,000 GLD shares in exchange for bullion.  The Trust is responsible to manage inventory so that the price of GLD shares tracks that of gold.

Interestingly, silver inventory at the SLV Trust has remained flat while price dropped during the last year.  It seems that silver bears are not as pessimistics as gold bears.  There are many other possible causes of the disparate behavior of GLD and SLV inventory.  What's your theory?