The registered gold inventory at COMEX available for delivery diminished to a mere 5.1 ton last week. What does it imply for the gold market?
COMEX is an exchange that offers metal warehousing and storage options for its clients. Gold may be stored there as eligible or registered. The latter category includes gold available for delivery to settle a futures contract, so the amount of these inventories tells investors how much metal is currently backing COMEX futures contracts.
COMEX inventories have been declining for the past few months and this downward trend accelerated in September. Inventories have plunged more than 35 percent, from around 11 million ounces to less than 7 million ounces this year so far. What is the most important is that the registered gold stocks dropped to only 162,034 ounces, the lowest level in COMEX history. This means that 1 ounce of gold is backing a record 252 ounces of gold paper claims on that ounce. Thus, without COMEX participants transferring eligible to registered inventories, there is a risk of default in case of a large request of taking delivery of physical bullion.
What does it mean for the gold market? Well, the falling COMEX inventories are usually a bullish factor. The drop in inventories suggests that the gold market is tight, as the shiny metal leaves COMEX. What is more, the declining inventory levels may be related to the currently observed backwardation in the gold market. Backwardation means that the future price of gold is lower than the spot price. This is an unusual situation in the gold market, as it occurs when there is a shortage of gold for immediate delivery. Theoretically, it may be caused by lost faith in paper money (the supply of gold is steady, so why would shortages occur?), but given that the greenback holds firmly, the reason is rather a temporary imbalance between buy and sell orders on the futures exchange.
The take-home message is that COMEX gold inventories are declining. This indicates that there are a number of parties that are removing gold from the market. This relatively scarcity is usually a bullish indicator. However, investors should be aware that eligible inventories could be converted into registered ones, while backwardation is only a temporary phenomenon in the gold market.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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