COMEX Gold Stocks at Dangerous Lows

Thursday September 19, 2013, 4:15pm PDT
By Andrew Topf - Exclusive to Gold Investing News

An article from Seeking Alpha points to an interesting trend that could bode well for the gold price.

Written by Hebba Investments, the article analyzes inventories held at COMEX gold warehouses, including eligible gold versus registered gold as well as “the registered gold cover ratio.” The latter is the number of gold ounces owned on COMEX gold contracts divided by each registered gold ounce.

For example, about a month ago, the cover ratio for registered gold stocks was around 50.62, meaning there were 50.62 owners of contracts for every ounce of registered gold stored at the COMEX, according to an earlier article by the same author.

A high ratio indicates that there are many more owners per ounce compared to registered gold — which is the only amount of gold in COMEX warehouses available for delivery. That’s because the other category of gold held in the warehouses, “eligible gold,” is stored on behalf of banks or private parties, but is not available for delivery of a futures contract. So, registered gold is more liquid than eligible gold.

After a big decline in registered and eligible gold stocks since the end of 2012, over the last few weeks inventories have started to build back up, as per the author. Eligible gold stocks rose last week for the fourth straight week, by 34,545 ounces.

However, registered COMEX gold inventories continued to decline, sinking 21,192 ounces last week. Where the rubber hits the road is the registered gold ratio. According to the author’s numbers, the ratio has reached a new high of 57 owners per registered gold ounce, meaning that “if only 1.7% of outstanding COMEX gold contracts stand for delivery then registered gold stocks (the only gold available for delivery) would be exhausted.”

What does that mean for gold investors? Hebba Investments makes it simple. At current registered gold stocks of around 665,000 ounces, multiplied by a gold price of $1,330 per ounce, total registered gold is worth about $885 million. If, however, just one hedge fund, which typically has over a billion dollars under management, decided to buy all the registered COMEX gold, it could easily do so.

Such an event could not only wipe out all the physical gold on the COMEX, but also force short sellers to acquire gold on the physical market, making the current COMEX “a very dangerous place to be for those shorting gold.”

In conclusion, says Hebba Investments:

“We believe this means the situation is still very bullish for gold investors in COMEX terms. Add the recent drop in gold prices over the last two weeks, and this may encourage physical demand to pick up further. Therefore the situation is still very bullish for investors in physical gold and the gold ETF’s (GLD, CEF, and PHYS).”

Read the full article on Seeking Alpha here

Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article.