Craig Hemke: There’s Really Nothing ‘Physical’ About The COMEX-LBMA ‘Exchange For Physical’

“how in the world does a swapping of derivative contracts, where there’s obviously zero physical metal involved, equitably determine the true price and…”

by Craig Hemke via GoldSeek

Very few people understand—or even know of—the opaque COMEX–>LBMA process known as “Exchange Futures For Physical”. Even the term is misleading, as there’s clearly nothing “physical” about it.

The first thing you need to understand is that this is NOT a new phenomenon. EFPs have been utilized within the derivative pricing scheme for years. In fact, one of the best articles/explanation for the process was written all the way back in 2009. You can read it here:…

Below is a key excerpt:

Last week, Dutch money manager Gijsbert Groenewegen added some additional background and an update to the current situation. You can read his work here:…

While Gijsbert focused his attention upon the ongoing use of EFPs in COMEX silver, we thought it necessary to point out the ongoing surge in the use of EFPs in COMEX gold, too.

Again, the use of EFPs in COMEX gold is nothing new. On average, the COMEX transfers out obligations for more than 5,000 metric tonnes of “gold” every year through this process. What’s currently unusual is the surge in EFP volume that began in 2017.

At Eric Sprott’s urging, we began recording the daily volume of COMEX gold EFPs on November 24, 2017. Since that date, the CME website has reported a total of 1,058,907 COMEX gold contracts under this Exchange For Physical process. At 100 ounces per contract, this equates to a settlement of a whopping 3,294 METRIC TONNES of “gold”. This places the annual run rate since November 24 of last year at about 7,500 metric tonnes, physically “exchanged” and settled through this process.

While it’s possible some of this “exchanging” is being done through the COMEX operations in Hong Kong, that appears to be only a small part of any settlement process. Instead, the vast majority of these “settlements” must almost certainly be taking place through London. But here’s the deal: The LBMA vaults hold only a fraction of the gold that would be needed to facilitate these trades.

Using data provided by the LBMA themselves, BullionStar’s Ronan Manly wrote this excellent bit of analysis last year. You can read the entire report through this link but, for this discussion, the primary section of importance is shown below:…

Simply put, if you exclude from possible “delivery” the gold held for the Bank of England and the gold held for the various ETFs, then the absolute maximum total of unencumbered gold held in the LBMA vaults is just 858 metric tonnes.

And again, since just November 24 of last year, the COMEX/LBMA have processed 3,294 metric tonnes through this opaque, Exchange For Physical process.

Do you see any issues here?

Gijsbert Groenewegen argues that, at least in silver, the EFP process is now being used as a price-setting mechanism where two parties are able to negotiate a transfer of contracts and physical liabilities. Perhaps he’s correct. However, if anything, the escalating abuse of this process has brought the sham and fraud of the digital derivative pricing scheme into greater focus. Mainly, how in the world does a swapping of derivative contracts, where there’s obviously zero physical metal involved, equitably determine the true price and value of underlying physical asset?

Additionally, what does the increasing volume of EFPs say about the state of the physical market and the availability in size of physical gold on demand? If the COMEX/LBMA is simply increasing the amount of leverage in the system (note the recent all-time highs in COMEX silver open interest:, one must wonder how stretched and stressed the pricing scheme has become.

In the end, your best strategy remains the gradual accumulation of physical gold and silver. When this current digital derivative pricing system finally fails, actual physical metal will be hard to come by, as the holders of digital/unallocated will be left scrambling for any crumbs that remain.

Use your time wisely and prepare accordingly.