Guest Post: Bron Suchecki – COMEX stock drawdown: single most important metric to watch

To understand what is going on with COMEX stocks, don’t look at the stock level – it will lead you astray. You need the metric I presented at the Gold Standard Institute’s 2009 seminar; one which Professor Fekete thought was the single most important metric to determine stress in the market. The second thing you need to do is put recent market action in historical context.
Firstly, lets review some historical stock levels for gold and silver for some key years – the 1980 peak, the 2001 bottom, 2012 and now. There is only one place I know that has that data going back that far, and it is It is a lot easier to follow by looking at the charts of the stock levels, which are available for gold and silver if you have a subscription. If not, then just sign up for a free trial, it will be worth it just to see the charts I’m talking about.The table below shows the average total (registered + eligible) COMEX stock in millions of ounces for each of those years.


First thing to notice is that even after the big gold drop being talked about, the total gold stock is still massively up on the 2001 bottom and the 1980 bull market. Not surprisingly, given the behaviour of SLV’s holdings, COMEX silver hasn’t dropped.However, the stock figure by itself doesn’t tell us much, as how can we compare the 1980s with today when we have a much larger economy. The important metric is to compare stocks in relation to open interest. If stocks decline but open interest declines as well, then the stock drop is to be expected.Thankfully Nick at Sharelynx calculates this for us – what he calls Owners per Ounce, or Stocks Cover and you can find the charts here. It is just open interest in ounces divided by stock in ounces. I like to invert it, which gives you a percentage indicating how much of the open interest is backed by stock, a sort of fractional reserves figure. The table below has those approximate figures I’ve eyeballed from Nick’s charts.



So even after that COMEX stock drop in gold, we still have a coverage ratio that is way above that which applied in the 1980 bull and which is not down much on 2012. The current coverage of around 20% also needs to be kept in context of the percentage of open interest which stands for delivery, which for gold and silver

over the past five years averages between 2% to 4%. So it looks like COMEX has plenty of stock on a historical basis. It is when that percentage coverage gets a lot closer to the average standing for delivery rate that we can consider COMEX under stress and at risk of cash settlement. We aren’t close, no matter how the much the pumper sites like to hype the recent stock declines.And for those who will say what about if everyone stands for delivery, well consider that while most of the shorts don’t have the metal, most of the longs don’t have the cash. We know this because of all the talk about margin calls causing people to have to sell. Think about that – if they couldn’t meet the margin calls, then it means they didn’t have the money to stand for delivery.


This article was originally published here:

In his role as Manager, Analysis and Strategy, Bron supports the marketing of The Perth Mint’s investment products, corporate planning and business development through research and strategic analysis of the precious metal markets. He has held a number of roles since joining the Mint in 1994 across its retail, treasury, depository, and risk divisions including Governance and Risk Manager and Company Secretary. For more information, see Bron’s LinkedIn profile.

8 replies
  1. tyonker says:

    So we now have a situation that seems different than in the 1980’s, but which has many similarities. Then there was a cabal of well financed longs who seemed to be manipulating the price discovery outcome in their own favor (the Hunts et al). They were able to get their way until the rules were changed and the powers of the US government were used to break the cabal. For sake of argument, it now seems that the cabal is composed of the same forces that stood against the Hunts in the past who are unable to stop or reverse the bull market except at select times (like now) but can occasionally cause much grief for the longs by using their relatively huge balance sheet capabilities to introduce large amounts of selling. The question in my mind that helps me to determine whether or not the manipulation is in fact real is this.

    If gold and silver are just commodities and have no importance to the Governments of the fiat money system then what is all the fuss about? Why on earth would the large banks take the time to worry such a small profit out such a risky marketplace? They can make gigantic spreads taking frn’s for nearly free and lending them to the dumb public via credit cards and car loans with much less trouble.

    For that matter, why did the banks and the Government go to so much trouble to put the fiat system in place in the first place? I can not believe the bankers went to all that trouble in order to be able to make the risk free profits that the Doc and Keith say are at the bottom of all the to do. I’m sorry but I just have not seen anything here that scientifically proves that this that or the other thing is the real cause of metals prices and just knowing those things is the true yellow brick road and oh by the way the futures markets are as honest as the church selling rosaries.

    For my money, the cultural proclivity that exists in some of the oldest civilizations to buy gold is the best teacher. Why is that proclivity there in the first place? Generations of abuse by rotten Governments through fiat money systems fills the bill nicely. So the basis is an interesting idea and may very well have some predictive value at times.
    But if it were that easy, there would be one very rich guy who owned everything because he knew the basis better than everyone else and all the rest of us would work for him. That simple it is not.

    • Keith Weiner says:

      tyonker: I haven’t studied in depth, but I strongly suspect that the Hunts lost their money ultimately because there was simply a lot more silver in the world than they had assumed. They bid up the price and pulled more and more silver into the market, and got buried under the avalanche.

      Leverage is the reason why longs experience grief on every price drop. Those who paid cash and have the metal under the mattress should experience no grief. It’s like buying an insurance policy, there’s no grief every day your house DOESN’T burn down.

      No one is claiming that the basis is a way to make risk-free trading profits. Trading, even with the basis, is not that easy. I prefer to trade the gold:silver ratio than the dollar-based gold price or silver price.

      What Professor Fekete and I are claiming is that if there is backwardation (which is intermittent and small nowadays) there is a risk-free profit to be made in arbitrage. A few tens of cents per ounce. The only risk is the risk of default, which I do not think will occur now, but which I am certain will occur in the not-too-distant future.

      • tyonker says:

        Niceties of the Comex notwithstanding, you did not address my assertions of market manipulation, the reason why the Asian cultures buy so much of the physical gold. Rotten privelege granted over time to the Banks through government fiat seems to be the answer to me.

        The Asian Cultures seem to have evolved a system which is impervious to the banks and their machinations. I believe you argue the same point. Gold is gold whatever the price in fiat money.

        My point is that the markets are composed of many different views as to price, basis being one consideration, the price of dollars being quoted in gold being a good place to start. I doubt if may Indian farmers concern themselves with the status of the basis.

        I still feel that the banks have evolved a way to control price discovery to their advantage by using the Comex. I do not believe the markets are run in such a way as to allow free market competition to set the price.

        I too appreciate your efforts and having a place to discuss those differing views.I think we both agree that the current state of affairs relative to what the world considers money is a very interesting thing to consider.

        • Keith Weiner says:

          tyonker: I have written tens of thousands of words–with much data–on why I do not believe in the gold manipulation conspiracy theory. If that was not persuasive, then another 50 or 100 in a comment thread does not seem likely to be.

  2. JimT46 says:

    There is a great misunderstanding about the so-called Comex warehouse. It is actually just certified storage at the major bullion banks for the most part (plus Brinks) and the “stocks” are either delivered gold waiting to be transferred to the new owner or transferred gold in storage. It doesn’t act as a “reserve” for anything. At the end of every trading day there is zero outstanding net supply or demand. All longs and shorts net out to zero.

    Both longs and shorts can exit their contracts at any time. As the contracts near expiration, shorts need to decide if they intend to deliver and must file a delivery notice with the Comex if they do. Those will be assigned to longs by time seniority. If a long doesn’t want delivery he can simply sell his contract. If a short doesn’t want to deliver he can do the same. Only matching orders remaining on delivery day will see bullion actually transfer.

    Comex stocks will give you an idea of how much gold is shuttling back and forth between large bullion banks but little else. They do tend to track market price as higher prices garner more activity. We need to get away from this idea that Comex stocks define the structure of the market. This is a futures market, not a physicals market. Price, volume and open Interest are far better gauges of structure.

    • Keith Weiner says:

      Good points Jim. And of course COMEX warehouses are not the only places on earth that are capable of storing gold. Is it necessarily meaningful to see if a gold bar transfers from a non-COMEX warehouse to a COMEX warehouse?

      Also, a bank may have a gold lease that matures prior to its obligation to deliver gold to a COMEX short. This asset is not a gold bar, but so long as the duration of the asset matches the duration of the liability there is no problem.

      • JimT46 says:

        I’m sure your question was rhetorical, Keith, but I’ll give an opinion anyway. :-)

        I don’t think it makes any difference if gold moves from a non-Comex vault to a Comex warehouse. The difference, in large part, is academic as any gold not registered with Comex is not in their warehouse even if it is sitting in the same vault. All gold for delivery must enter the warehouse from a non-Comex vault if it isn’t sitting there already, having previously come from a non-Comex vault. The warehouse is just a transit system to allow for proper oversight of Comex guaranteed contract fulfillment. Anyone registering their metal with Comex is obviously thinking of delivering at some point so you do get that information. There are some fine points I’m not covering but that is the simple version.

        I do want to say that I have learned to look at the metals markets and economics in general in a new light thanks to your work. I am a committed “Austrian” but you and your colleagues have given me a fresh perspective. Thanks!

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