COMEX Update: JP Morgan on the Ropes in Gold as Silver Coverage Reaches Record Low

On the surface, everything still looks fine at the COMEX, but the data reveals more going on.

This analysis focuses on gold and silver within the Comex/CME futures exchange. See the article What is the Comex? for more detail. The charts and tables below specifically analyze the physical stock/inventory data at the Comex to show the physical movement of metal into and out of Comex vaults.

Registered = Warrant assigned and can be used for Comex delivery, Eligible = No warrant attached – owner has not made it available for delivery.

Gold

After 11 months of consistent net outflows, gold has finally seen some modest inflows of 700k ounces in April. At the moment, it’s hard to know exactly why the restock has happened beyond identifying the inflows as coming from JP Morgan and Manfra. It’s quite possible that actual supplies got low enough that they had no other choice but to scrounge up what gold they could.

Figure: 1 Recent Monthly Stock Change

The daily activity has been fairly muted except for two large moves of 643k ounces and 578k ounces from Eligible to Registered. I have had a theory for some time that the metal in Registered is not really available for delivery and that the 11M ounces are mainly for optics.

The theory originated by looking at the pre-Covid data when Registered made up a mere fraction of the total inventory (Figure 6). When Covid happened there were concerns about meeting all delivery demands and so the major vaults shuffled some metal around and poof, all of a sudden Registered was a massive amount of total inventory.

This doesn’t just happen overnight though. You don’t go from 1.5M ounces to 17M ounces because you found a little extra metal in a vault somewhere. That is going from $3B to $34B. My argument is that this was an optics move. Paper contract holders finally got nervous (rightfully so) about whether they could actually turn their paper into gold and delivery volume started to increase. The Comex decided to change some rules and inflate the amount of gold available. But in terms of actual physical metal, nothing really changed.

As mentioned, the recent inflows combined with the move from Eligible into Registered supports that theory. Why would they move 1.3M ounces of gold from Eligible into Registered just as the April delivery month got started even though there were already 11M ounces in Registered? Simply because there aren’t actually 11M ounces of available gold in Registered.

The main driver was JP Morgan. They moved exactly 578,718 ounces on each of the two days (3/24 and 3/31) from Eligible to Registered. This brought their total Eligible down to 577,966 ounces, with Registered increasing to 3.6M ounces. So yes, JP took from their lower Eligible stockpile and moved it to their Registered bucket so that it was available for delivery just in time for the April contract delivery period. If JP Morgan needs to defend gold again, it would completely wipe out their Eligible metal.

The April gold contract ended with 21k contracts open at First position which means the 2.5M ounces JP originally had in Registered was more than enough to cover the entire delivery volume of April if JP Morgan decided to meet 100% of delivery demands. Clearly, not all of the 2.5M in JP Morgan Registered is actually available.

Figure: 2 Recent Monthly Stock Change

Pledged gold has seen a slight uptick in April after a big drawdown that started in September last year.

Figure: 3 Gold Pledged Holdings

Silver

Outflows in silver have continued with 4.6M ounces flowing out so far in April and 9M leaving in March. Last year, the outflows were coming mainly from Registered, but this year has seen a change with the majority of outflows coming from Eligible. This suggests two possibilities. First, there is simply no actual Registered left that doesn’t have a claim on it. Second, Eligible holders are not feeling comfortable with their metal sitting in Comex vaults.

Figure: 4 Recent Monthly Stock Change

The daily activity shows that the outflows have been steady. There were only three inflows over the last month with a 2.2M inflow on April 12th. Contrast that to 19 days of Eligible outflows and it should be clear to see what direction the metal is headed.

Figure: 5 Recent Monthly Stock Change

The table below summarizes the movement activity over several time periods to better demonstrate the magnitude of the current move.

Gold

• • The monthly inflow increased total gold inventory by 2.6%
  • Registered is now at the largest share of total inventory on record (Figure 6)
  • Over the year, inventories are down an incredible 39% or 14M ounces

Silver

• • Inventories continue to get hammered down 3.7% over the month
    • • Registered fell by 10% over the month, bringing total Registered to 34M ounces. This is nearing the 31M ounce low seen in February and presumed to be a potential floor of actually available metal. It will likely get tested again
  • If Registered has reached a bottom, this would explain why the outflows have now become concentrated in Eligible

Palladium/Platinum

Palladium and platinum are much smaller markets but it’s possible that is where the market breaks first.

• • Palladium was quiet
  • Platinum had a surge in inventory to meet delivery demand and ensure there wasn’t insufficient supply as happened in January

Figure: 6 Stock Change Summary

The next table shows the activity by bank/holder. It details the numbers above to see the movement specific to vaults.

Gold

• • Manfra and JP added over the month
    • • JP also did the move of 1.3M ounces of Eligible into Registered as noted above
      • JP Morgan is down 6M ounces or 43% over the last year

Silver

• • JP Morgan saw a drop of 5.7M ounces with Loomis falling 4.4M ounces (down 27.6%)
  • Only HSBC and Delaware were net positive on the month, adding a combined 2M ounces against the other vaults that saw 12M in outflows

Figure: 7 Stock Change Detail

Historical Perspective

Zooming out and looking at the inventory for gold and silver shows just how massive the current moves have been. The black line shows Registered as a percent of the total.

As mentioned above, the recent shuffling has brought Registered to 56.8% of the total inventory. This is quite odd and a major deviation from history. Again, the explanation is that the rest of Registered is not really available for delivery and so they have to bring over what they can from Eligible into Registered to satisfy demand.

Figure: 8 Historical Eligible and Registered

Silver has seen a very slight uptick in the Registered/Total ratio as Eligible has been hit harder by outflows. Even with the recent move, it remains near historic lows at 12.4% of the total.

Figure: 9 Historical Eligible and Registered

Below shows just the Registered component. The recent mini spike occurred just as the March delivery contract started. It has almost entirely reversed as contract holders turned paper into metal and then took their metal out of the vault!

Figure: 10 Historical Registered

The LBMA had been seeing similar outflows of silver from their vault, but that appears to have stopped for now.

Figure: 11 LBMA Holdings of Silver

Available supply for potential demand

With the Comex focused on increasing Registered, the available supply has improved modestly to 3.9, meaning there are 3.9 paper holders for every available physical ounce of Registered. Eligible has deteriorated rapidly, increasing to over 5. This is the highest value since the flood of inventory in April 2020.

Figure: 12 Open Interest/Stock Ratio

Coverage in Registered silver is far worse than gold and reached a new low for the move of 23.34. This came from a combined drop in Registered along with a surge in open interest. To reiterate, for every physical ounce of Registered silver, there are more than 23 paper ounces!

Figure: 13 Open Interest/Stock Ratio

Wrapping Up

On the surface, everything still looks fine, but the data reveals more going on. Gold did see a restock in recent weeks, but this looks more like a desperation move. Silver saw a similar uptick in December that was immediately undone the following month. We have been talking for some time about how Silver is leading gold by 6-12 months. Thus, it is quite likely that the inflow into gold will reverse relatively quickly.

Further, JP Morgan is exhausting their Eligible supply to backstop the delivery market. The total amount remaining in Eligible is less than 600k and would be wiped out if JP Morgan had to do another move of Eligible to Registered.

However, the most concerning piece by far is the coverage in silver. As supplies dwindle and interest in precious metals picks up… this could lead to a major break in the Comex. Platinum did see delivery volume exceed available supply in January, but the Comex was able to scramble to come up with the metal it needed. It’s unlikely they can pull off a similar move in Silver. First, the market is much bigger than platinum (though still relatively small). Second, it appears the Comex has already been fighting a battle in slow motion over the last year.

As outflows continue, the bottom of the vault will be reached. Based on the current pace, that bottom might be reached sooner rather than later. At that point, the physical price of silver could go vertical. It’s better to be prepared before that happens.

Data Source: https://www.cmegroup.com/

Data Updated: Daily around 3PM Eastern

Last Updated: Apr 19, 2023

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