The COMEX Issues and Stops Reports Expose COMEX Physical Gold Supply Problems

Right now, the latest COMEX Issues and Stops reports expose COMEX physical gold supply problems. Though I have written about the various reasons why physical gold supply problems manifest many times in the past, this topic still remains one rarely discussed by financial journalists, and never discussed by the mass financial media. For client accounts, when bullion banks stop more notices than issued, they, will lose physical inventory. For house accounts, the opposite is true. When bullion banks issue more notices than stops, then they will lose physical inventory as well. Normally, when bullion banks manufacture waterfall declines in paper gold and silver prices, as they did earlier this month, with the complicity of the CME’s largely unreported rampage in raising initial and maintenance margins on futures contracts many times within a 2-month period in the midst of a stock market crash, they load up on physical gold and silver for their house accounts while ensuring that their clients take almost zero delivery of physical gold and silver ounces. However, if they are unable to execute this clever strategy, this is when physical gold supply problems can manifest.

In fact, I have not seen a single news site in the entire world, except for my own, mention the relentless increase in initial and maintenance margins in gold and silver futures contracts (the 100-oz gold futures contract and the 5000-oz silver futures contract) for the past two months, in a desperate attempt to knock long positions out of the game and thereby prevent an increasing amount of physical delivery requests. Just recently, the CME raised margins yet again for 100-oz gold futures contracts to $9,185/$8,350 for initial/maintenance margins, representing a massive 86% increase in margins, and for 5000-oz silver futures contracts to $9.900/$9,000 for initial/maintenance margins, representing a gigantic 73% increase in margins, in just a couple months’ time. Normally, such relentless increases in initial/maintenance margins in gold futures markets is sufficient to prevent physical gold supply problems from afflicting futures markets, but the fact that even this reliable manipulation mechanism failed recently is a sign of additional tectonic earthquakes to come in the global financial system.

However, as you can see for the data I have compiled for the behavior of issues and stops for client and house accounts for bullion banks in gold and silver from December 2019 to March 2020, this pattern of normal behavior, in which bullion banks take advantage of their own artificially manufactured paper gold and silver price plunges to load up on physical metals at the expense of their clients, has strongly reversed during this four-month time span. I have only included data for the major gold (100-oz) and silver (5000-oz) futures contracts below and not for the mini gold (10-oz) and mini silver (1000-oz) silver futures contracts.  

COMEX gold issues and stops data for March 2020
COMEX silver issues and stops data for March 2020

Furthermore, I only separated out the bullion banks by name that had several hundred to a few thousand contracts stopped or issued, and compiled all other data under the category of “all others”. For those of you that don’t understand the terminology “stopped” and “issued”, the categories refer to the number of delivery notices that were “issued” (short positions issuing notification that underlying gold/silver would be delivered) and “stopped” (long positions receiving a delivery notice). Therefore, when delivery notices are “issued” in house accounts, the issuing bank is on the hook for delivering the physical ounces associated with the underlying contracts. On the contrary, when notices are “stopped”, then the stopping bank would receive notification of the future delivery of the physical ounces associated with the underlying contracts. The same holds true for client accounts. Thus, all bullion banks desire more stopped than issued notices for their house accounts, and desire more issued versus stopped notices for their client accounts. This way they accumulate more physical inventory during artificially engineered paper price crashes.

As you can see, the massive engineered drop in paper silver prices versus the massively higher physical silver prices for the past month backfired on the bullion banks, as it led to a frenzy of clients asking for physical delivery, whereas in the past, bankers had been able to chase client long positions out of the market without ever being on the hook for physical delivery. Thus the amount of contracts stopped versus issued for clients was nearly break even for silver futures contracts, a pattern I have not witnessed in a long time during a banker raid on paper silver prices.  And in regard to house accounts, under past similar circumstances, I had always observed JP Morgan bankers taking a tremendous amount of physical silver delivery during engineered collapses in paper silver prices. However, during the last four months, this situation did not materialize, perhaps due to the stress on physical stores of silver created by so many clients asking for physical delivery. As you can see in the data I complied above, this time around, JP Morgan bankers were nearly absent in taking physical silver delivery for their house account.  In fact, for the bullion bank house accounts, the amount of stopped versus issued contracts, net, was only 74 contracts, or a mere 395,000 AgOzs for their House accounts. As a basis of comparison, during similarly engineered collapses in paper silver prices in the past, JP Morgan alone was able to accumulate and take delivery of many millions of physical silver ounces.

In regard to real physical gold delivery, the situation was even worse for bullion bankers than their situation with real physical silver delivery, which likely has given rise to physical gold supply problems at the current time. In their client accounts, physical delivery requests exploded, with the net (stopped minus issued) totaling 8,095 contracts representing 800,950 AgOzs of real physical gold requested for delivery. In their house accounts, the bullion banks were unable to yield a positive net situation either, with issued contracts exceeding stopped contracts by 6,107 contracts, representing 610,700 AgOzs.  Thus, when adding these two figures together, the bullion banks are on the hook for delivering more than 1.4M AgOzs.

This unexpected demand on bullion bank physical gold reserves has undoubtedly led to a disruption of physical gold delivery associated with the gold futures markets, though various COMEX spokespeople have claimed there is no shortage of physical gold whatsoever, and that the disruption of delivery is simply due to a disruption in the supply chain caused by the coronavirus pandemic, i.e., when in doubt, blame the coronavirus pandemic for all manifested stresses revealed in the global financial system. Earlier, here, on 24 February, I speculated, well before US stock markets started to crash, that the coronavirus pandemic would be scapegoated for the market crash, and I was 100% right.  Is it possible that the coronavirus pandemic is now being scapegoated for shortages of physical gold as well?

Oddly, a gold analyst, Ole Hanson stated in response to the shortages of gold physical supply in the futures markets: “There is plenty of gold in the market, but it’s not in the right places. Nobody can deliver the gold because we are forced to stay home.” The explicit function of COMEX warehouses is to store the physical gold that backs gold delivery associated with gold futures contracts. Consequently, why is the physical gold “not in the right places” and in these warehouses, as if it is stored where it is supposed to be stored, and the data is accurate (1.76M registered AuOzs and an additional 6.98M eligible AuOzs in COMEX warehouses as of 26 March 2020), there should be no physical gold shortages to meet physical demand right now? Did Mr. Hanson, in his statement that gold is “not in the right places” unwittingly reveal that the reported COMEX warehouse data is fraudulent?

Secondly, some would suggest that ever since the COMEX mandate that paper gold could be used to close out physical delivery requests through EFP (Exchange For Physical) transactions by Exchange Rule 104.36 enacted on February 18, 2005, which allowed for the substitution of gold ETFs for physical gold, that no physical shortage of gold could ever result. Since paper was allowed to replace physical, could not bullion banks just literally “paper over” any physical supply deficit? And if the answer to this question is yes, then why is the COMEX experiencing physical shortages of gold right now? Well, as I explained in an article that I published on my news site in June 2011, in which I explained how EFP transactions operate (which you can read here), “the Related Position [Physical] must have a high degree of price correlation to the underlying of the Futures transaction so that the Futures transaction would serve as an appropriate hedge for the Related Position [Physical].”  Consequently, since there has been a massive price decoupling between physical and paper gold prices, perhaps this price decoupling has enabled the underlying holder of longs in gold that asked for physical delivery to reject any EFP transaction, since there is no longer a “high degree of price correlation” between paper and physical gold, and to insist on physical gold delivery with no substitution for this request. And this rejection of EFPs and EFS (exchange for swaps) as acceptable behavior is perhaps what is causing the physical gold supply problems in the futures markets right now.

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6 thoughts on “The COMEX Issues and Stops Reports Expose COMEX Physical Gold Supply Problems

  1. “Secondly, some would suggest that ever since the COMEX mandate that paper gold could be used to close out physical delivery requests through EFP (Exchange For Physical) transactions by Exchange Rule 104.36 enacted on February 18, 2005, which allowed for the substitution of gold ETFs for physical gold, that no physical shortage of gold could ever result.”

    I like your analysis, but this statement above is actually incorrect. I see over and over again analysts saying that EFP allows bullion banks to avoid physical delivery, and force unallocated delivery in London. This is not true.

    If a long stands for physical delivery, then the Comex must assign/match that position with a short intent on delivering physical bullion, not paper metal. There is absolutely no way around this fact.

    EFP is optional for long’s and they were turning it down in mass last summer as exposed by the EFP basis spread blowout. If a long wants the real metal, they just let the contract ride through expiration on the Comex.

    EFP is actually used by owners of unallocated metal to buy futures positions in the Comex as a directional trade that also raises cash. Basically, using EFP is how the LBMA buys futures. They exchange paper metal for cash and the desired futures position – long or short. EFP in most cases is used almost entirely by bullion banks to buy short positions.

    The LBMA is short precious metals, they exchange paper metal for the short futures position and cash. This is how they can raise cash by selling metal they printed out of thin air, and short the price of it through short futures positions which reduces their liability to the unallocated metal they “printed” in the first place.

    All EFP transactions in the commodity markets involve two parties positioning themselves the same way – either both long or both short. It makes no sense to use an EFP to buy the opposite futures position you hold in the physical commodity. There is no point for the LBMA to buy long positions as stated in this article. The long’s in NY don’t have to take this type of trade, nor is their nay incentive for London to make them.

    For instance, it makes no sense for an oil refiner long oil to by a short futures position. The oil refiner wants the price to go up, but needs cash. He sells his oil for cash, but maintains his long position using the futures market.

    The bullion banks are short the metal (they want the price to go down), so they buy short futures positions with the unallocated accounts, plus receive cash, which is called an EFP.

    Furthermore, rule 1034.36. This rule is not as described in the article. This rule actually allows traders to substitute ETF shares in place of the underlying commodity for the futures position and cash. So, a bullion bank can now (since 2005) exchange shares of GLD for short futures positions and cash.

    You sort of covered this – but, in my opinion, the real reason the EFP market blew out (the basis spread got extremely wide last summer) was because arbitrage between NY and London failed.

    Why? There was no incentive for long’s in NY to exchange their position for “physcial” (just paper) in London – most likely, because the market understands that an unallocated long position in London is a much worse deal than a long futures position in NY which could take real delivery of the metal. This is especially so, considering the prevailing thought that a physical shortage was present.

    This EFP basis blowout underlines my point that this cross market mechanism cannot be used to force long positions out of the futures market to take unallocated delivery.
    Long’s in NY did not want the paper metal, nor did they take it, nor do they have to take it, nor is the EFP mechanism used for such purposes – all of this was exposed by the EFP basis spread explosion. The EFP market literally failed because NY long’s were not buying London paper.

    Why would the LBMA who is short the metal, exchange their paper for a long position? The long’s who want physical delivery, would never take that deal, and the bullion banks would have exchanged paper for a bullish directional position that would increase the price of the paper liability they have on every unallocated account they use for EFP transactions.

    No matter what anyone says or thinks. There is no way to stop a run on Comex precious metals by papering over it. There is, thus, no way to stop a default.

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