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Don’t Believe The Hype; Comex Gold Warehouses Well Stocked – Two Analysts

(Kitco News) - Gold inventories in Comex vaults remain well stocked and there is no looming physical gold crisis despite continued rumors, according to not one but two precious-metals research reports released on the same day.

Monday, U.K.-based bank Barclays and U.S.-based independent research firm CPM Group both released reports dismissing rumors that there is a physical gold crisis in today’s marketplace as gold held in Comex vaults remains at low levels.

The issue of Comex inventory levels started up again in earnest Sept. 9 after Peter Hambro, chairman and co-founder of Petropavlovsk, a Russian-based mining company, said in an interview with Bloomberg TV that “it’s virtually impossible to get physical gold in London.”

Hambro also questioned whether it is better to hold physical gold or paper futures traded on Comex.

Chart courtesy of CPM Group.

“I really worry that the market, that paper market, could be stamped on and people will say ‘sorry we’re going have a financial close-out,’ and it’s all over,” he said in the interview. “If you want to be in the gold business, you ought to be in the physical business.”

Although the ratio between open interest in Comex gold futures against physical inventories has fallen since March 2014, CPM Group noted that it is still at historically high levels “and presents no perceptible risk of imminent problems with deliveries.”

“There is no crisis brewing on Comex. In fact, by most measures the Comex is better stocked now than it was for most of the first 30 years of the existence of a gold futures contract on the Comex,” the report said.

The research firm warned investors against these “bogus arguments,” which have been floating around the marketplace since at least 2013. Although the consultancy sees the yellow metal as an “excellent” investment, the firm is not forecasting a rally until at least 2017.

“With gold and other precious metals prices having fallen in recent months and remaining weak, a few gold marketing groups have become more desperate about convincing investors to keep buying gold, resorting to misleading market commentary suggesting that gold prices are about to ‘explode’ sharply higher due to fundamental tightness,” the analysts said.

Barclays analysts went into even more detail in their dismissal of “shortage” rumors, providing three reasons why they are false.

The U.K. bank noted that the current ratio shows that total open interest equals about 200 ounces of gold to one ounce of physical delivery. “However, we believe this does not reflect the physical delivery mechanism in the gold futures market,” the analysts said.

They explained that only front-month contracts are eligible for physical delivery. According to their research, “the total curve opening interest has grown relative to front contracts; thus, using total opening interest would overestimate the relevant financial interest.”

Barclays also said that it is important to look at how many days there are before first-notice day. The bank notes that open interest normally declines sharply in the last few weeks before first-notice day.

“This is due to financial players closing positions to avoid the risk of a short squeeze …. Due to a sharp drop in opening interest, the coverage ratio of physical stocks improves dramatically leading up to first-notice day,” the report said.

The finally reason Barclays gave, dismissing the inventory-crunch rumors, was in the types of gold stocks housed in Comex warehouses. There are two types of stocks: registered and eligible. Barclays explained that while they are both physically the same, only registered stocks are available for delivery. Although registered stocks have declined, they note that eligible stocks remain sizable.

“It is an easy process to assign warrants to eligible stocks, and in the case of a strong economic incentive, eligible stocks should yield a quick supply of deliverable stocks,” the bank said. “There are several possible reasons for the decline of registered relative to eligible stocks. Since the mid-2000s, global central banks stopped being net gold sellers. European central banks especially ceased to be ready sellers after the central banks’ gold agreement. In addition, EM demand for gold has shifted some metals into Asia, especially with conscious efforts from countries such as China to develop local gold trading hubs.”

By Neils Christensen of Kitco News;
Follow me on Twitter @neils_C



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