The demand for physical delivery off of the COMEX futures exchange continues at an unprecedented rate. What does this mean for 2021 and beyond?
As most precious metals investors know, physical "delivery" from the COMEX futures exchange has always been a sort of illusion designed to maintain some semblance of legitimacy for the pricing scheme utilized there. If no metal is ever delivered at the price discovered through derivative trading, then how can that price be considered acceptable?
For years now, "delivery" on COMEX has consisted of nothing but paper swaps. One bank issues some warrants and warehouse receipts, and another bank takes "delivery". Two months later, the bank that took "delivery" issues back out some of the same warrants and some other bank takes delivery. It was nothing but a continuous paper shuffle designed to create the illusion of physical delivery.
And the stated volume of these "deliveries" was miniscule compared to the total global gold market. For example, all of calendar 2015 saw just 16,218 gold contracts "delivered" on COMEX. For the full year! See this excerpt from a post we wrote back in the summer of 2016:
Was 2015 an anomaly? Nope. Let's look at the years that followed.
2016: A total of 71,382 contracts "delivered" for 7,138,200 ounces or 222 metric tonnes.
2017: A total of 31,477 contracts "delivered" for 3,147,700 ounces or 98 metric tonnes.
2018: A total of 25,970 contracts "delivered" for 2,597,000 ounces or 81 metric tonnes.
2019: A total of 63,569 contracts "delivered" for 6,356,900 ounces or 197 metric tonnes.
As we've been chronicling since late March, a crisis of confidence has enveloped the COMEX in 2020. Due to the partial EFP defaults of March 23 and March 24, the CME Group has acted quickly to shore up confidence in their exchange by providing new contracts and alternative delivery methods. They've even gone so far as to make provisions for fractional delivery of London Good Delivery Bars! Here are a few links to posts we've written previously on this matter:
- https://www.sprottmoney.com/blog/the-cme-opens-pandoras-box-craig-hemke
- https://www.sprottmoney.com/blog/a-crisis-in-confidence-craig-hemke
- https://www.sprottmoney.com/blog/a-crisis-of-confidence-part-two-craig-hemke-may-19-2020
And now look at how delivery demand has exploded in 2020. The numbers you see below are up-to-date as of September 14.
2020: A total of 173,733 contracts delivered for 17,373,300 ounces or 540 metric tonnes.
As you can see, total deliveries for 2020 thus far almost total the combined amount of "deliveries" for the entire period of 2016-2019. And 2020 is not over yet. Based upon the current open interest numbers, the usually-light delivery month of October may see as many as 20,000 deliveries, and December is typically the busiest delivery month of the year, so we could see as many as 60,000 posted then. If that plays out, the COMEX will end up delivering over 25,000,000 ounces of gold in 2020. That's approaching 800 METRIC TONNES!
Again, you must keep in mind that in the previous era of bank charades passing for "delivery", just 649 metric tonnes were allegedly "delivered" in the five-year period of 2015-2019. The year 2020 alone—after the COMEX nearly imploded on March 23 and with the CME Group "opening Pandora's box" by converting their futures exchange into a physical delivery platform—will likely see over 800 metric tonnes. That is a mind-blowing change that holds all sorts of implications for 2021 and beyond.
For example, from where will COMEX source its gold in order to meet a continued rush of delivery demand? Already, the CME Group has quietly amended its policies in order to utilize just about every refiner ever known to have existed. See this from Ronan Manly at BullionStar:
And what if physical demand increases beyond what has been seen in 2020? With Warren Buffett giving his tacit approval for owning gold recently, a rush of new demand for physical metal may follow. Consider just this news headline from a few days ago:
The article says that one little police and fire pension fund wants to move 5% of its assets into gold. But note that the fund has $16B in assets. Thus, 5% equates to $800,000,000 and that buys them about 400,000 ounces or 12.5 metric tonnes. That alone is 25% of what COMEX allegedly "delivered" in 2015, and that's just one obscure U.S. pension fund! What happens as more and more institutions and pension funds shift assets into gold (and silver)? How do we not reach a point of physical depletion and exchange collapse?
So what's the lesson in all of this?
You're going to read and hear A LOT of noise about gold over the next few days as the FOMC meets and attempts to explain how their policies are helping the U.S. recover from the Covid Crisis. Your challenge will be to keep your eyes upon The Big Picture and not allow your emotions to be swayed by the daily tick-for-tick gyrations of the fractional reserve and digital derivative COMEX gold market.
Instead, recognize the direction all of this is trending and set yourself on a steady course of consistent accumulation of physical precious metal. Do not settle for unallocated accounts, and avoid the shares of ETFs like the GLD.
Diversify your assets and acquire physical metal only. Hold it yourself or at a trusted storage company. If you think 2020 has been a wild year, wait until you see what comes next. Use your time wisely and prepare for a consequential 2021, where just about anything will be possible.
About the author
Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.