Introduction

In an article two weeks ago, I reported that gold traders on the COMEX were taking delivery of an unusually large number of contracts. This article is an update, and I have added a chart on silver. The deliver situation for silver is even more remarkable than for gold.

Gold has jumped $10 per ounce today as I write this (12/22/05). I wrote an article showing how the Tokyo Commodities Exchange (TOCOM) had doubled their margin squeezing out players as the price of gold dropped $40 in a few days. One reason for today’s jump is that TOCOM cut its margin back to what it was before they doubled it.

COMEX futures data reveal the action

New York’s COMEX futures exchange is the center for gold trading in the United States. The standard contract is 100 oz, worth about $50,000. The margin to trade a contract is $2,025, or about 4%. For a speculator, this means a margin of 25-to-1. Currently, there are 335,000 contracts open, covering gold worth $17 billion.

A COMEX gold futures contract can be settled by delivering or receiving gold bullion at a COMEX-designated warehouse. But most futures traders unwind their positions before the delivery period begins; so normally, physical deliveries and purchases of gold are a relatively small part of the picture. A long speculator will stay in the market by opening a new contract each time an old one approaches expiration and is closed out. Short speculators typically do the same.

But from time to time, some big players may actually buy or deliver physical gold at a COMEX warehouse. Something surprising has been happening recently: long speculators are taking delivery in much larger numbers than in the past. Warehouse supplies of gold bullion are still large, but deliveries show a different character of the investors.

The delivery period for gold is the last month that a particular contract trades. The most recent contract to expire was October, and the December contract is now in its delivery period.

Since the beginning of December, there has been a big jump in delivery notices by long speculators. They now have 19,372 contracts (or 1,937,200 ounces) of gold called upon. This represents 42% of the registered gold in COMEX warehouses. (It was 38%.) A daily report of warehouse stocks is available from the COMEX at http://www.nymex.com/GC_wareho.aspx

COMEX data is provided daily, but not with historical time series, so it is not immediately obvious that recent deliveries have been unusually large. For comparison, I obtained delivery data for the recent October contract, where deliveries rose to a then surprisingly high 11,072 contracts. To compare the two months, I have overlaid the October contract with the December contract. December is way ahead of October. The chart below is updated to 12/21/05.

The data to monitor progress for the above chart can be found at: http://www.nymex.com/media/delivery.pdf

The silver story is even more surprising

The same kind of analysis and chart is now added for silver below:

The chart above shows that the silver situation is even more extreme than the gold with the number of delivery contracts 8 times what they were in October. The number of issues is now 7,511 contracts of 5,000 ounces each, accounting for 37,555,000 ounces. The warehouse-registered stocks of silver are 66,834,033 ounces, so the delivery is now at 56% of registered ounces. (It was 43% on December 8.) There is still plenty of time for the situation to be sorted out with re-tendering of contracts by speculators who don’t really want the final delivery, but this demand is not typical.

The trading at the COMEX is not what drives gold and silver, it is the economic use for jewelry, industrial applications and financial store of value compared to the supply. The details of the internals of the working of this intricate market get driven by those fundamentals, and when we see these kinds of unusual actions it means that the situation will be much more volatile than in normal times. In effect, these technical measures are a good indicator of how the players see the changes in the fundamentals that are driving the markets. So we are getting insight that the precious metals markets are poised for much higher volatility and probably higher prices ahead.

My conclusion

The world demand for all commodities is growing so rapidly that some players are recognizing the value of taking physical delivery. But by doing so they have come close to disrupting the normal patterns of operation of a highly leveraged futures exchange. The demand for deliveries testifies to the underlying fundamental desire to use the metals -- and that is bullish for prices, even from today’s apparently high levels. A generation ago both precious metals were driven to extremes ($850 for gold and $50 for silver) when participants decided to take possession. The environment now is looking right for another move to record-setting extremes.

© 2005 Bud Conrad
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