Comex Outflows Spell Trouble for Physical Metal Supply Chains
Over the last year, banks and investors have silently removed physical metals from the Comex. There is -36.8% less gold, -43.4% less palladium, -53.9% less platinum, and -17.3% fewer silver holdings than a year ago.
There are a few terms to understand about the chart. The words are eligible, registered, and warrant.
1. Eligible: No warrants are attached. The owner has yet to make it available for delivery.
2. Registered: Warrants are attached and available for delivery.
COMEX warrants are classified as electronic documents of title under the Uniform Commercial Code (UCC) and are issued by Exchange-approved COMEX depositories. Each warrant is registered at the Exchange and linked to specific bars with identifiable and unique warrant numbers traceable to each COMEX gold depository.
Month over month, precious metal holdings have decreased because buyers have taken physical possession of the metals. Most of the time, delivery never happens with a precious metal futures contract. A future contract is for 100 ounces of gold. Usually, investors control the contracts on a margin of 15%. The price of gold today is around $1993. For our example, I will use $2,000 to keep numbers easy. Instead of putting up $200,000, the investor can control the contract for $30,000. The investor must pay the total amount to take physical possession, which rarely happens in typical markets. If the investor pays the total amount, the seller must deliver the metals at the term of the contract. The Comex guarantees this delivery process. Looking at delivery rates gives a good indication of "smart money" market assessments. The more smart money takes possession of physical metals indicates a soured view of other investment vehicles like stocks, bonds, and real estate.
The problem is that Comex precious metal deliveries can behave like a bank run. Bank runs happen when people believe the bank won't be able to return the depositor's money. The collapse of SVB began when investors realized the bank would only be able to return about 0.80-0.90 cents on the Dollar deposited. When the largest banks and hedge funds consistently take physical metal delivery, it sometimes creates panic about supply chains. Investors will make a run on physical metals. Prices and premiums can jump very quickly. It happens like Hemmingway's quote in The Sun Also Rises, “gradually, then suddenly.”
What does it mean?
In the last weeks, the global banking system fell apart. Two U.S. banks collapsed, and Swiss banking giant Credit Suisse was infused with $53 billion. Three days later, Credit Suisse's rival, UBS, bought Credit Suisse for a fire sale of $3 billion. Gold prices climbed nearly 4% due to the market banking panics. More and more people realize they need to diversify where they store their wealth and will choose to put some money into precious metals. Physical deliveries at the Comex will likely not only continue but increase. As deliveries increase, it is predictable that inventory will become more challenging to locate. If a precious metals Comex run happens, inventories will be tight, shipping times long, and premiums high.
A massive price tornado is brewing for precious metals. The banks going down has moved the economy from a tornado watch to a warning. It may be time to take economic shelter in precious metals. We are a precious metals company and believe precious metals belong in every portfolio. If you agree that precious metals belong in your portfolio, you may not want to wait any longer. The price of gold is almost $100 more than a week ago.
It may be time to shore up your portfolio with precious metals. Whether you are a precious metals newbie or a seasoned investor is fine. We have highly-trained professionals to help you every step of the way.
Call the U.S. Gold Bureau for a free consultation.