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Comex Inventories Interesting and What This Means

I read this article on SeekingAlpha and felt it was worth posting here. Very educational and informative. Please note the charts are viewable via the actual attributed source.

http://seekingalpha.com/article/1883961-weekly-comex-gold-inventories-action-starts-to-pick-up-at-the-comex-gold-warehouses

Weekly COMEX Gold Inventories: Action Starts To Pick Up At The COMEX Gold Warehouses

Last week we noted that it was relatively a slow week, though not much of a surprise since it was a holiday week in the United States, but December deliveries were approaching and we expected to see a lot more action as we got into December. This week that's what we saw as there was big additions to both COMEX registered and eligible gold - with the vast majority of eligible additions in the Scotia Mocatta warehouse - the rest of the warehouses were quite quiet.

Keeping track of COMEX inventories is something that is recommended for all serious investors who own physical gold and the gold ETF's (GLD, PHYS, and CEF) because any abnormal inventory declines may signify extraordinary events behind the scenes that would ultimately affect the gold price.

We will take a closer look at these numbers but let us first explain the COMEX a little more for investors who are unfamiliar with it.

Introduction to COMEX Warehousing

COMEX is an exchange that offers metal warehousing and storage options for its clients. The list of their silver warehouses can be found here and their gold warehouses can be found here. In the case of silver and gold, the metal is stored at these official warehouses on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse. This offers large holders of precious metals a convenient way to store their metal with minimal storage fees - very convenient indeed if you hold large amounts of gold or silver and you don't want to store them in your basement.

Silver and gold stored in these warehouses can fall into two categories: Eligible and Registered.

Eligible metals are those that conform to the exchange's requirements of size (1000 ounce bars for silver and 100 ounce bars for gold), purity, and refined by an exchange approved refiner. Eligible metals are stored at COMEX warehouses on behalf of banks or private parties, but are not available for delivery for a futures contract.

Registered metals are similar to eligible metals except that these metals are also available for delivery to settle a futures contract. COMEX issues a daily report on gold, silver, copper, platinum, and palladium stocks, which lists all the metal that is currently stored in COMEX warehouses and how much eligible and registered metal is present.

This information allows investors insight into how much metal is currently backing COMEX futures contracts, what large gold and silver owners are doing with their metals, and how many clients are requesting delivery of their metals. There is a lot more to glean from this information but for the purpose of this article we will focus on the gold drawdown.

This Week's Changes: Active Week in Both Registered and Eligible Gold

Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.

As investors can see, last week saw a tremendous increase in registered gold inventories as 108,420 ounces were added to registered gold stocks - a close to 20% increase in total registered gold stocks in one week! Additionally, we saw an increase in total COMEX eligible stocks as well - but that's been the pattern over the last few months.

Another interesting thing to note is that almost all the action was seen in Scotia Mocatta warehouses.

90% of the net additions to registered gold were in the Scotia Mocatta warehouse. Additionally, the only other warehouse to see significant activity for the week was the HSBC warehouse where a little over 63,000 ounces were added to eligible gold stocks. As investors can see, for the week most of the activity was concentrated in these two bank warehouses - maybe we can expect to see them delivering much of this gold later in the month.

COMEX Gold Open Interest and Registered Gold Owners per Ounce

Finally, let us take a look at possibly the most important number when it comes to COMEX gold inventories - the registered gold cover ratio. We've discussed this in-depth in a previous article so please refer to that article for details, but in a nutshell it is the amount of investors owning a claim to each registered gold ounce (i.e. owner per registered gold ounce).

As one would expect, this week's large increase in registered gold stocks and decline in COMEX open interest caused total owners-per-ounce to plunge to 54.8. Though to keep this into perspective, 54.8 is still a historically high number that was never seen previous to a few months ago - we're still well into parabolic territory for owners-per-ounce.

Conclusion for Gold Investors

As we've mentioned in the previous week's article, December should be a very busy month in terms of COMEX inventories, and this week we began to see a lot of gold come into the warehouses - specifically in the Scotia Mocatta warehouse. Since December is usually the busiest month for deliveries, this gold may be used to fill deliveries for outstanding contracts so it shouldn't come as a surprise to investors that activity has picked up - last December we saw multiple days where more than 100,000 ounces were removed from COMEX inventories.

At this point we see no reason to sell our gold position based on the COMEX gold inventories, and this week gold has been acting quite strange as it seemed to rise on positive economic reports - which has been the opposite of its recent short-term behavior. We remain gung-ho on gold and we believe it's a good time to continue to build positions in physical gold and the gold ETF's (SPDR Gold Shares (GLD), PHYS, CEF). For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (GG), Agnico-Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG) or Hecla Mining (HL).

One last thing to leave the gold bulls with that has little to do with COMEX inventories, but a lot to do with gold. The positioning in Commitment of Traders report this week shows something very interesting - Producer/Merchants (think bullion banks and gold producers) have a net-long position on gold for the first time since mid-2008, which were the depths of the gold plunge during the financial crisis. This is very interesting and though we can't cover it in this article (I'll try to put something out soon if next week it remains positive), it is something gold investors should look at further and a reason to be patient and bullish on gold.