COMEX’s Gold and Silver Futures Market Trade Data Not Adding UpWe have been following both the gold and silver futures markets since June with great interest. We could see in the data a buildup of demand for physical metal against short futures positions. And indeed, the summer has seen quite a bit of physical metals “delivered” between players on the COMEX futures market.
So far in 2020, the exchange has seen 172k contracts of 100 oz gold delivered, valued at $25.7 billion. Silver deliveries in 2020 have been even more extraordinary, with 43,798 contracts of 5000 oz silver delivered, valued at $5.8 billion.
These are large numbers for the precious metals market which does not routinely see so much physical settlement in a year. The vast majority of contracts are rolled into the next available delivery months, or settled for cash.
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This basically means players on the market are looking to take the metal off the hands of traders and put it into safe storage. And while the numbers of physical deliveries have been staggering this year, gold being taken off market has been a trend dating back to the tech crisis in 2000. The following chart, for instance, shows that majority of gold stored in COMEX allocated to the “eligible” category, which is vault storage and NOT used in futures market trading. See chart below from goldchartsrus.com.
So the fact that deliveries have ramped up on the metals is not surprising, and it could be that we are in a short squeeze in the market for the metals. While the COMEX claims there is enough gold in registered to satisfy current deliveries, we have started to see some anomalies in the data which potentially paint a different picture.
On August 28th, the last day of the month to roll over an existing September contract to the next active contract month in December, we see CME group reporting open interest of 3070 contracts. See screenshot from the CME website below.
What is interesting is that you are not supposed to be able to deliver more contracts of gold ounces in a month for which you have open interest, because you can only deliver against open contracts. Typically, we see many contracts rolled until the last day and then the rest are settled. But so far for September, the CME group is reporting 3457 contracts posted for delivery, or 387 more than the 3070 that should have been available to be posted. And we are only 6 days into the month of September, at time of this writing.
What gives on the COMEX? We are not sure, but it sure looks suspiciously like we have a “shadow” contract being presented on COMEX for delivery. That, or all of the CME group accountants need to be fired for failing to do basic math correctly.
The errors could be forgiven if they miscalculated the amount of paper futures contracts rolling from one month to the next. Well not really, but at least it would have much less effect on the overall price of gold. Why is this? Because as we have shown numerous times this year on our site, when physical deliveries pick up, the prices of gold and silver always follow.
And this is to be expected, because while the COMEX allows as many paper derivative contracts to be placed as bets on the market price, we only have a finite amount of the real metals available on the market at any given time. Those cannot be printed up at the push of a button on a computer like the paper contracts can be. This has two effects on the market.
First, when the physical deliveries are miscounted, the paper contract derivative trades overstate short term speculative interest in the metals versus those willing to take ownership. Secondly, and probably more importantly, it overstates the amount of physical metals available for delivery on the futures market for those that want to take delivery. It basically amounts to fraud, much as if your bank claimed to have enough cash for your deposit, and then notified you when you showed up to the bank that you would have to wait 2-3 months to get your cash.
Contract Volume Discrepancies
Since we have been watching the COMEX so intently this year, we have noticed some other discrepancies in the reported contract volume on COMEX. The next series of screenshots shows various daily reports in which the CME group reported more physical deliveries that day than the amount of closed contracts.
That again appears to indicate physical gold and silver are being exchanged without closure of a corresponding contract. Does this mean gold and silver are being raided off the COMEX market without a corresponding futures contract settlement? You can decide this for yourself, since CME group has never provided the transactional data needed to “true up”, from an audit perspective, their aggregate trading volumes.
Looking at the shadow contracts and discrepancies in daily contract numbers makes on question all of the gold and silver market data reported by the CME group for the COMEX market. Who knows how long the mistakes in accounting have been allowed to exist. Just because the CME reports a number, I know of no audit of the transactional data published to guarantee its authenticity.
If the market is misreporting the amount of open contracts and the deliveries of physical gold and silver, then how can market participants rely on this data to make trading decisions on the futures market?
Further, how do we all now value the gold and silver prices used in our daily physical transactions? The answer is we don’t, and this will lead to a new era in how the public views the gold and silver market. While these shadow transactions exist in particular, I expect the market to heavily question COMEX’s reported physical inventories. Just like a fear of cash shortages would cause a run on the banking system, fears of physical precious metals could cause a run on whatever is left in the COMEX warehouses.
Then we would see a rapid change in the prices of gold and silver, which would have to be determined off-exchange. These would seemingly come from physical market exchanges by large parties, from banks to wealthy individuals. It may be much harder to pry gold and silver from their current owners if they are unsure current prices are high enough to properly value them.
And then what happens to the miners? If they do not have a legitimate pricing mechanism via the COMEX, how do they forecast metals prices for their mine business models? We may see a flurry of independent contract negotiations from merchants using the metal directly to the miners producing it, circumventing the whole futures exchange model.
We will see how long the issues persist in the CME futures data reporting. But it is becoming clear that the system that the world uses to value precious metals may about to undergo rapid changes when the world finds out how unstable that system currently is.