Comex On The Edge? Paper Gold "Dilution" Hits A Record 124 For Every Ounce Of Physical

Tyler Durden's picture

Over the few days, we got what was merely the latest confirmation that when it comes to sliding gold prices, consumers of physical gold just can't get enough.

As the Times of India reported over the weekend, India's gold imports shot up by 61% to 155 tonnes in the first two months of the current fiscal year "due to weak prices globally and the easing of restrictions by the Reserve Bank. In April-May of the last fiscal, gold imports had aggregated about 96 tonnes, an official said."

This follows confirmations previously that with the price of gold sliding, physical demand has been through the roof, case in point: "US Mint Sells Most Physical Gold In Two Years On Same Day Gold Price Hits Five Year Low", "Gold Bullion Demand Surges - Perth Mint and U.S. Mint Cannot Meet Demand", "Gold Tumbles Despite UK Mint Seeing Europeans Rush To Buy Bullion" and so on. Indicatively, as of Friday, the US Mint had sold 170,000 ounces of gold bullion in July: the fifth highest on record, and we expect today's month-end update to push that number even higher.

But while the dislocation between demand for physical and the price of paper gold has been extensively discussed here over the years, most recently in "Gold And The Silver Stand-Off: Is The Selling Of Paper Gold And Silver Finally Ending?", something unexpected happened at the CME on Friday afternoon which may be the most important observation yet.

Recall that in the middle of 2013, in an extensive series of articles, we covered what was then a complete collapse in Comex vaulted holding of registered (i.e., deliverable) gold.  At the time the culprit was JPM, where for some still unexplained reason, the gold held in the newest Comex' vault plunged by nearly 2 million ounces in just six short months.

More importantly, the collapse in registered Comex gold sent the gold coverage ratio (the number of ounces of "paper" gold open interest to the ounces of "physical" registered gold) soaring from under 20 where, or roughly in line with its long-term average, to a whopping 112x. This means that there were a total of 112 ounces of claims for every ounces of physical gold that could be delivered at any given moment.

Gradually, the Comex raid was relegated to the backburner when starting in 2014 the amount of registered gold tripled from the upper 300k range to 1.15 million ounces one year ago, at which point the slide in Comex registered gold started anew.

Which brings us to Friday afternoon, also known as month end position squaring, when in the latest daily Comex gold vault depository update we found that while some 270K in Eligible gold had been withdrawn mostly from JPM vaults, what caught our attention was the 25,386 ounces of Registered gold that had been "adjusted" out of registered and into eligible. As a reminder, eligible gold is "gold" that can not be used to satisfy inbound delivery requests without it being converted back to registered gold first, which makes it mostly inert for delivery satisfaction purposes.


Most importantly, this 25,386 oz reduction in deliverable Comex gold from 376,906 on Thursday pushed the amount of registered Comex gold to an all time low: at 351,519 ounces, or just barely over 10 tons, registered Comex gold has never been lower!


Incidentally, as part of the month-end redemption requests, we saw a whopping 22% of the eligible gold in Kilo-bar format (where there is no registered, just eligible) be quietly whisked away from Brink's vaults: unlike traditional ounce-based contracts, the kilo format traditionally serves as an indication of Chinese demand, and if withdrawals on par with those seen on July 31 persist, it will soon become clear that Chinese buyers are once again scrambling for the safety of gold now that their stock market bubble has blown up.

This covers the sudden surge in demand for physical gold as manifested by CME data.

Meanwhile, over in "paper gold" land, things remained unchanged: as shown in the chart below, the aggregate gold open interest rose modestly to 43.5 million ounces up from 42.9 million the day before.


While on its own, gold open interest - which merely represents the total potential claims on gold if exercised - is hardly exciting, as we have shown previously it has to be observed in conjunction with the physical gold that "backs" such potential delivery requests, also known as the "coverage ratio" of deliverable gold.

It is here that things get a little out of hand, because as the chart below shows, all else equal, the 43.5 million ounces of gold open interest and the record low 351,519 ounces of registered gold imply that as of Friday's close there was a whopping 123.8 ounces in potential paper claims to every ounces of physical gold.

This is an all time record high, and surpasses the previous period record seen in January 2014 following the JPM gold vault liquidation.

Another way of stating this unprecedented ratio is that the dilution ratio between physical gold and paper gold has hit a record low 0.8%.

Indicatively, the average paper-to-physical coverage ratio since January 1, 2000 is a "modest" 19.1x. As of Friday it had soared to more than 6 times greater.

Which brings us to the usual concluding observations:

First: as we have said previously, at a time when all the gold selling (and naked shorting) is in the paper markets and when demand for physical gold is once again off the charts, with soaring purchases not only in India but also in the US, where is this gold going? Clearly not into CME gold vaults, which are once again a source of physical gold, and as the above shows, have never had less deliverable gold.

Second, total Comex gold has dropped to such precarious levels in the past and while on many occasions market observers have asked if the Comex is close to a failure to deliver, aka a default of the CME's gold warehouse, it has always avoided such a fate. Still, one wonders: the 10+ tons of deliverable gold at the Comex are now worth a paltry $383 million. It would not be very complicated for a next generation "Hunt Brother" to buy some $400 million in Comex gold, and promptly demand delivery: after all the gold crash of two weeks ago saw some $2.7 billion in paper gold dumped in the most illiquid market - why can't it be done in reverse. What would happen next is unknown, but unless somehow the Comex found a way of converting millions of ounces of Eligible gold into Registered, the CME would simply be unable to satisfy such a delivery request.

Third: while there are still over 7 million ounces of Eligible gold, why the recent spike in "adjustments" of eligible to registered gold (i.e., missing a warehouse receipt)?

Finally, we assume the mainstream press will once again start paying close attention to the total, and especially registered, gold held at the Comex: at a pace of 25K a day, the gold vaults that make up the CME's vaulting system would be depleted in just under two weeks of daily withdrawals.

In any case, we are very curious to see how this latest dramatic face off in the long-running war between paper and physical gold, concludes.

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y3maxx's picture

silver is money.

gold is like bitcoin ... useless

Manthong's picture

Oldie but a GOLDIE…

38BWD22's picture



And right on cue, gold takes a dive.  PAPER prices...

Antifaschistische's picture

So, I'm a simple guy.

so, you're saying...123 out of 124 people, who THINK they own gold...dont, actually, own....any gold.

no biggy.

remain calm's picture

What I don't understand is why wealthy net longs who own a lot of physical don't BUY a lot of paper and then ask for delivery. Mr Sprout and other wealthy mine owners What The Fuck are you waiting for???

Manthong's picture

he is in on the scam..


Oracle of Kypseli's picture

Maybe just maybe this article will induce fear on gold ETF buyers which will bring the price of gold even lower!

Just thinking. Can this be right?

Four chan's picture

i cant wait till gold and silver hit zero in relation to the dollar so i can go straight up king midas.

Haus-Targaryen's picture

So Gold is at about $1100 right now -- x 124 = almost $150k per ounce.  

Just say'in.  

Captain Debtcrash's picture
Captain Debtcrash (not verified) FL_Conservative Aug 3, 2015 2:43 PM

If there were ever a good time for the physical market to assert itself and put the naysayers in their place it would be now. 

Big Corked Boots's picture

The premiums on Walking Liberty Halves are extraordinary. Anything in decent condition sells for $8 each on ebay. I saw a roll of Kennedys go for $180.

It's enough to drive a stacker to buy bars....

Billy the Poet's picture

A liquor license is as good as gold.

Took Red Pill's picture

Liquor is as good as gold. Fixed it for ya.

BaBaBouy's picture

Manipulation Not Withstanding...
$42000. GOLD Would Probably Be A Fair Price Right Now.

clade7's picture

Common core accounting mistake, a ribbon for all participating!...

Kaervek's picture

Can someone tell me if there's a limit to the gold cover ratio? Are they allowed to go above 140x to say 1000x?

beaker's picture

Can anyone answer this?:  If the physical is so scarce and the paper so plentiful, Why isn't this spread blowing out and exposing this great manipulation????

Countrybunkererd's picture

I actually heard that number before... 155K i believe possibly due to the same calculation, i paid little attention to the number but you triggered the memory of it.  Also just sayin.

Four chan's picture

lets round down to the nearist 100,000 and call it a day.

TheFutureReset's picture

I think that number might have come from a 100% dollar backing scenario. Of course, it's not straight math in this case. As the price rises demand would fall after a certain point. At 123/1 the price should go up, but not by 123x, somewhere in the middle, as demand would decrease as the price rose. My guess is at $20k - $50k / oz. 

Squid-puppets a-go-go's picture

I'm sure you fellers are sharp enough to appreciate, but for those who are new to this information - it doesnt imply a price of $155k as the false demand of 124 claims per ounce drops away as the price rises - when gold is $2000, what portion of those 124 are now willing to sell? what portion at $5000? how many are still holding at $10k

obviously the dilution of demand from a ratio of 124:1 is as preposterous as anything ever seen in modern markets (hell, lehman and bear sterns were only leveraged at about 35:1 ), but aint no-one should be thinking $155 k is the 'upside'  

My hat is in the ring at stabilizing  $8000 / oz with brief speculative blow off momentum in the $12-$15 000 range

Billy the Poet's picture

it doesnt imply a price of $155k as the false demand of 124 claims per ounce drops away as the price rises


DEFINITION of 'Giffen Good'

A good for which demand increases as the price increases, and falls when the price decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve.

Read more:
debtor of last resort's picture

Cut away evil speculators and it's only 55k Haus.

explosivo's picture

That assumes a linear function which I doubt it is. 

booboo's picture

hmmm, a gold pee pee. Keep jackin

Countrybunkererd's picture

gold ding dong!  My pee is already golden, but i don't try to stack it, store it, or keep it in any way.

The9thDoctor's picture

This is why I don't invest in precious metals.  The table is tilted, the game is rigged, it's a big club and we ain't in it.

With this legalized fraud, and absolutely nothing we can do about it, I fail to see the point of owning metals.

With these massive fraudulent sell orders, you will get crushed.  Back in 2011, gold was at $1,900 and all of the paytriot blogs were pushing buy, buy, buy, it will go to the moon, gold will be $25,000 get in now!  How wrong they were.  All it took was market manipulation and gold is smacked all of the way down to $1,080 last I checked, which is 2009 levels.  Only a fool would goof around with a rigged game without connections.

The other reason why I am bearish on PMs is that the average joe not only doesn't know what gold is "worth", he couldn't care less what gold is.  Mark Dice offered people a 1oz gold coin for face value, with NO takers.  He also offered a 10oz silver bar or a Hershey's bar with everyone picking the $1 Hershey bar.  Now if we took these same average joes and offered to rent them out a wood and stucco ticky-tacky cookiecutter, they would gladly fork over an ENTIRE paycheck, EVERY month for it.  This is why I am interested in RE and not metals, cashflow vs. hunks of metal in a vault.

i cant wait till gold and silver hit zero in relation to the dollar so i can go straight up king midas.

That would be the only way I would "get in" to PM's is when they are dirt cheap.  WHEN silver is back down to single digits, and gold down to $300, I would reconsider.  With enough market manipulation at its current trends, this will be inevitable.  As for supply and demand, well heck, silver will be $8 an ounce, and industry will just be shit out of luck, and have to use substitutes because the price discovery is totally broken.  When silver becomes "too cheap" it will just be exhausted before TPTB let silver have a price discovery over $50 ceiling.

chiswickcat's picture

Mark Dice is... Err, dicey. It is not proof at all of people's perceptions. If he was offering a five bedroomed house for $5. How many people do you think would take the deal? None, I expect.

daveO's picture

Why people can't see thru editing is beyond me. Like the blind taste test commercials they used to run on TeeVee when I was a kid. Then, Jaywalking with Jay Leno. They simply edit out unwanted answers!

Socratic Dog's picture

As many have said before me, when the paper price goes to $300 you sure as shit won't be paying $300 for physical.  If you can find any at all, it will be WAY over $300.

Big Corked Boots's picture

"With this legalized fraud, and absolutely nothing we can do about it, I fail to see the point of owning metals."

Everything is manipulated. Why own anything, then?

Bingo Hammer's picture

Yes paper manipulation can take the "paper" price anywhere "they" want BUT when you have an industrially essential commodity (eg silver) that the even most cost effecient mining company cannot extract from the Earth for lower than say $15 then at some point the miners must stop mining or go bust.

That moment when paper manipulation smacks its face into the closed gates of the mines shouldn't be too far away now I imagine.   

BandGap's picture

The "average Joe" doesn't make the rules. Simple as that.


astitchintime's picture

The9thDoctor ....

With all due respect, you do not invest in precious metals.  You own them for insurance against currency 'mishaps'.

So, NOW would be a great time to pick some up if you haven't in the past.

P.S.  In a 'perfect' world you might readily do that but in today's 'less than perfect' world AND totally broke-ass market ... good luck with that !!

Took Red Pill's picture

9th doctor, its all how you look at it. Don't think of gold and silver as an investment like real estate. Think of it for what it is; MONEY. Those papers we have that say federal reserve note are not money. They are IOU's. Obviously, you don't want all your eggs in one basket, but its good to have precious metals because they hold value over time.QE has diluted the value  of $'s even further. If the dollar loses reserve status they will quickly become worth much less. You may have a million dollars in the bank but what can you buy with it. History is full of examples of this happening and its only a matter of time before the $ has the same fate. Gold helps to preserve that wealth. It is money everywhere in the world and has been for thousands of years.

fockewulf190's picture

"This is why I don't invest in precious metals.  The table is tilted, the game is rigged, it's a big club and we ain't in it.  With this legalized fraud, and absolutely nothing we can do about it, I fail to see the point of owning metals."

Your stuck thinking in a fiat world.  The history of paper money tells you all you need to know...THEY HAVE ALL FAILED.  Thinking that "this time is different", that currency failure can´t happen in the 21st Century is foolish.  The current fiat currencies in play today are all being printed into oblivion, and all the manipulation games currently underway are desperate attempts to maintain status quo.  It works until it doesn´t, and when it fails, your phyzz and your other hard assets  are the vehicles which store your wealth as you transition through the Great Reset and, if you have some wealth left once a new financial system is established, you can restart your life and thrive with needed seed capital.  Most stackers follow this line of thinking.  Some stack dreaming of massive fiat gains, yet refuse to think about what $10,000+ gold really means.  It means with gold at those prices or higher, the existing fiat currency has lost the one thing that keeps it alive...confidence.  Prices for all goods and services will adjust accordingly into the hyperinflationary once confidence is lost and current fiat currencies die off.

Just give a quik scan of the current situation we find the world in.  Debt levels continue to increase every single day.  Nobody is paying off any of the principle.  Uncovered liabilities worldwide continue to explode.  Total derivatives have long since entered the quadrillion zone. Default risks are everywhere.   Everybody with at least half a brain knows it´s all unsustainable, and the math has been screaming this message from the rafters for years nowThe system will fail, we just don´t know when.  Take each day as another gift to prepare.  The Great Reset  will be horrible.   Trade your paper for hard assets while they are still available.....and forget about the fiat price for it!

BandGap's picture

"In fact, before last year we had never been at even 40 owners per registered ounce - so we're truly entering uncharted territory."

Love the laughs but does anyone know why China is getting deliveries? Are they getting preferential treatment of some kind?

Socratic Dog's picture

You'd be foolish to think otherwise.

Billy the Poet's picture

I prefer to say "wolfram." It just sounds cooler.

MalteseFalcon's picture

"It would not be very complicated for a next generation "Hunt Brother" to buy some $400 million in Comex gold, and promptly demand delivery: after all the gold crash of two weeks ago saw some $2.7 billion in paper gold dumped in the most illiquid market - why can't it be done in reverse."

One word: nailgun.

Squid-puppets a-go-go's picture

you cant nailgun the entire oligarchy of russia/china/india

38BWD22's picture



remain calm

COMEX can just default on the physical and pay with paper (a check).  It's in the rulebook (someone posted a link long ago here at ZH).