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: http://www.goldchat.blogspot.
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.