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This COMEX Plan Backfired

Patrick Heller, Liberty’s Outlook, has previously discussed why gold and silver prices are strong right now. They include 1) rampant inflation of the money supply that began in September 2019, and 2) soaring debt levels that have accelerated as governments around the globe imposed lockdowns to try to minimize the spread of the Covid-19 coronavirus.

A new reason for the acceleration of higher gold and silver prices has been the massive number of maturing gold and silver futures contracts on the COMEX that have been settled by delivery of the physical metal, Heller said.

Patrick Heller wrote the following in his newsletter:

For the previous 30 months to March 2020, a growing percentage of maturing COMEX gold and silver contracts were being settled by the exchange for physical (EFP) option.

In EFP settlements, the contract’s short seller paid the contract owner (the “long”) cash plus a futures contract for the same quantity of ounces in the London market. EFP settlements were the most expensive way for short sellers to meet their obligations. But, they were forced to do this because the COMEX warehouses didn’t have enough registered gold or silver inventories to make physical delivery of the underlying metals.

For a time, owners demanding delivery of maturing COMEX gold and silver contracts could make an extra profit equal to the cash they received in a settlement by EFP. That made COMEX contracts more valuable than those in the London market or in the physical markets.

That encouraged investors to specifically purchase COMEX contracts with a far higher percentage of contract holders then demanding delivery upon maturity.

As a result the price of gold and silver COMEX contracts began to trade at higher prices than in other markets. In late March, COMEX gold contracts traded as much as $100 per ounce higher than in the London market!

Officials at the COMEX and the London Bullion Market Association came up with a plan to settle the gold and silver markets in New York.

The solution – transfer so much physical gold and silver into COMEX warehouses that contracts called for delivery would receive the actual physical metal.

Since contract longs would no longer receive extra cash when calling for delivery, the idea was that it would diminish demand for COMEX contracts in absolute terms and reduce the demand for delivery of maturing contracts.

From April through June, the COMEX delivered almost 10 million ounces of gold, almost completely discontinuing EFP settlements. That was more than seven times the number of COMEX gold contracts settled in the first quarter of 2020, the majority of which were settled by EFP. I don’t have the statistics for how much silver was physically delivered in the second quarter 2020, but the results were comparable to what happened with the COMEX gold exchange.

Did this strategy work? No!

This COMEX Plan Backfired!

As recently as 2016, almost 70% of the demand for COMEX gold contracts came from the bullion banks and precious metals trading firms. In many instances, this demand came from brokerages buying back their short positions at a profit after driving down gold’s price. In effect, most of the demand came from parties who did not remove gold from the market.

But, when the COMEX started to deliver physical gold (and silver), demand soared from hedge funds and other investors that had no interest in leaving their metal as registered inventory in COMEX warehouses. Over the past few months, the bullion banks and precious metals trading firms have accounted for only about 40% of demand for delivery of COMEX gold contracts. The huge increase in demand came from parties who want to own the gold rather than use it for short-term trading purposes!

With it becoming more difficult to acquire physical gold and silver in the London market and with significant shortages of physical bullion in recent months, demand for COMEX gold and silver contracts has increased specifically from parties that want to own the physical metals!

As a result, there is growing demand for COMEX gold and silver contracts, with the result that prices of the metals in this market are again higher than in London or the physical markets.

For now, COMEX officials have been able to scrounge up enough gold and silver to add to inventories to make deliveries of the physical metal.

That has been possible because of the temporary cessation of demand from China and India, the world’s two largest gold consuming nations.

Most gold bars are produced in Switzerland. In recent years up to early this year, most of these bars were going to China. When that country locked down to combat the spread of Covid-19 coronavirus, Chinese demand dwindled to almost zero.

As a consequence, in the past couple of months, almost all Swiss gold bar production has gone to the US, primarily to the COMEX.

Now that China, and India, are resuming more normal commercial activities, look for global demand for physical gold and silver to rise far above current levels.

In other words, even though the price of gold has, year to date, outperformed every global stock index and all 28 of the foreign currency values I track, it is definitely possible that gold and silver price increases could accelerate in the second half of 2020.

Editor’s Note: Patrick Heller is editor of Liberty’s Outlook, 1 year, 12 issues, $159, published by Liberty Coin Service, 400 Frandor Ave., Lansing, MI 48912. Liberty Coin Service has been a dealer in rare coins and precious metals since 1971, www.libertycoinservice.com.


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