- Will COMEX Gold Market Fail Within 90 Days?
by Patrick A Heller, http://www.coinweek.com/
New York’s COMEX commodity gold market has been one of the two most important venues referenced for determining the price of gold for all other trading purposes. Yet this market, which largely reflects the trading of paper contracts rather than physical metal, is quickly heading toward the point where it may no longer be used in setting the price of gold in the physical cash markets. There are two significant developments which could make the COMEX gold market obsolete within the next 90 days.
The COMEX gold market exists as an easy way for investors to take a position in the price of gold without the necessity of having to bother with possession of the physical metal. The contracts traded on this exchange are for 100 ounce gold bars that are deliverable almost exclusively in some future month. Most traders, since they are only investing in the price, pursue one of two options as a contract nears maturity. They might purchase an offsetting contract to close out their position entirely or, if they wish to continue to invest in gold, they might close the contract by trading it for one with a maturity further into the future. Historically, only a tiny percentage of COMEX gold contracts are held to maturity to take delivery of the physical metal.
The COMEX bonded warehouses store gold for two different purposes. Gold bars can be “registered” on the COMEX, which means that the gold is specifically being held for physical delivery to a customer holding a maturing contract. Sometimes investors will use the convenience of COMEX storage but not commit their holdings for delivery against COMEX contracts. Such inventories are classified as “eligible,” which means they could be used to deliver on a maturing COMEX contract, but only if the owner decides to make it available for that purpose. While total COMEX inventories are important, the key figure is only the registered quantities, because only they can be called upon to fulfill maturing contracts.
Total COMEX gold inventories have declined by more than one-third since the beginning of 2013. Registered inventories are now below one million ounces and declining quickly. Many analysts, including me, believe that the significant decline in exchange traded fund gold holdings this year was caused by major gold dealers cashing in shares. The probable reason they have done this is to obtain physical gold to deliver to maturing COMEX contract holders who wanted to take physical possession.