The Comex Does Not Trade Gold

By Dave Kranzler

Unequivocally, gold does not trade on the Comex. The Comex trades paper gold derivatives. It is a futures and options exchange on which a small amount of 100 oz. gold bars change ownership each contract month. The transfer of title is facilitated by the creation of an electronic record called a "warrant." But even these "warrants" which assign title to specific bars are derivatives. Presumably gold is "delivered" to the parties who stand for delivery (the "stopper"). But that "delivery" most commonly is the electronic transfer of a warrant from the entity short a paper gold contract to the entity who is long the same.

Because the CME and the CFTC do not place a limitation on the number of paper gold contracts - 100 ozs per contract - in relation to the amount of gold reported in Comex vaults - the price discovery function has been largely removed. As an example, as of Wednesday there were 489,955 open contracts representing 48.9mm ozs of gold, or 1531 tons (roughly 50% of the amount of gold annually produced globally). Lucky for the Comex, less than 1% of the open interest in any given month stands for delivery.

At the beginning of the contract "roll" period, there was well in excess of 200,000 April contracts open representing over 20 million ozs of gold. If 50% of these longs decided to stand for delivery because the Comex appears to be only entity with gold deliverable in quantities, not only would the gold determined to be free and clear of encumbrances and conforming to Comex delivery specs - i.e. "registered" gold - be wiped out but the entire Comex gold stock would be wiped out. But there's just one problem. The "eligible" gold - gold not registered - belongs to someone else who does not want that gold loaned, leased or hypothecated.

If the Comex regulated the open interest such that the amount of open interest was tied to the amount of gold in Comex vaults - since theoretically eligible gold can be registered - the resultant introduction of price discovery would force the price of gold much higher - higher to a level at which the price functions to balance supply and demand - not paper supply/demand in the form of printed contracts - but physical supply/demand based on the amount of gold sitting in Comex vaults as reported by the Comex vault operators. Given that apparently there's not much gold in London and a massive imbalance between paper gold and physical gold on the Comex, it would likely require a significantly higher gold price to balance the physical gold supply and demand.

Currently a run on Comex gold appears to be starting, notwithstanding the Comex's attempt to kick this can down the road with the use of Exchange For Physicals (EFPs) and Privately Negotiated Transactions (PNTs). But EFPs/PNTs are nothing more than second order derivatives created to sidestep the delivery of Comex bars. In fact the EFPs were used largely to transfer the settlement liability of a Comex contract to the LBMA.

Physical gold thus in fact does not trade on the Comex. Rather, the Comex is nothing more than a derivatives exchange with a small amount of physical gold relative to the notional value of the derivatives created.

As with the rest of the paper Ponzi schemes created by the banks and Central Banks, the Comex's derivatives house of cards has always been fated to collapse. Based on all indications plus the signs of desperation emanating from the Comex and the LBMA, the collapse has begun. This will ultimately lead to much higher prices for gold and silver. Note: this situation started to unfold well before the virus crisis.

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