“The weight of all this delivery demand may eventually lead to a force majeure-style failure, but that’s very likely not coming this month or next.”
June 30, 2020
Demand for physical delivery through the COMEX futures market continues, and this has significant implications for the future of the current fractional reserve and digital derivative pricing scheme.
It’s now mid-summer and the July COMEX contracts have moved into their delivery phase. The numbers are as amazing as they are historic, thus this updated summary is necessary today.
Back in late March, the COMEX nearly failed, as Covid-related sudden delivery demands in the spot gold market drove massive losses for many of the Bullion Banks. Much has been written about this since, so there’s no need to recap what happened. However, a handy summary—including an easy-to-understand explanation of the COMEX “delivery” process—can be found here:
Due to this near failure, the CME Group and the LBMA rushed to turn the COMEX futures market into a physical delivery vehicle in a desperate attempt to restore legitimacy to the derivative-only trading that takes place there. Remember, without underlying physical delivery, a commodity futures market might as well be trading baseball cards. Some physical delivery MUST be made at the futures contract price, otherwise the price discovered through futures trading is utterly illegitimate and fraudulent.
In late March, the CME and LBMA rushed to market a new contract that purported to “deliver” fractional ownership certificates in 400-ounce London Good Delivery Bars held within the LBMA vaults. Additionally, the CME publicly encouraged the use of COMEX contracts for physical delivery, and in doing so may have sealed their fate. We wrote about this on March 31 and strongly encourage you to re-read this link now:
Three months later, it’s clear that the CME has indeed opened “Pandora’s box” and the Bullion Banks that operate on COMEX are desperately trying to hold the entire pricing scheme together.
Let’s start with COMEX gold…
Over the past several years and for as far back as I have records, an average “delivery month” for COMEX gold sees anywhere from 6,000-10,000 “deliveries”. In the period 2015-2019, the highest amount of monthly “deliveries” came in June of 2016 with 15,785 contracts. The lightest delivery month in this period was just 922 contracts in April of 2017. For the sake of this current comparison, note that April of 2019 saw 7,149 “deliveries” and June saw just 2,522.
Again, to restore legitimacy to their COMEX exchange, the CME Group openly moved to make the COMEX a delivery vehicle in April of this year, and the result is astounding:
• For the delivery month of April 2020: 31,166 total deliveries
• The non-delivery month of May 2020: 10,277 total deliveries
• The delivery month of June 2020: A blowout of 55,102 deliveries
• On just the first day of the non-delivery month of July: 3,316 deliveries
Obviously, these numbers are astounding and highly unusual when compared to COMEX history. At 100 ounces per contract, the 55,102 deliveries in June amount to 5,510,200 ounces or about 171 metric tonnes of gold.
Oh, and be sure to note that ALL of these deliveries are taking place through the traditional COMEX Jun20 futures contract. Remember that new contract mentioned above? The one that purports to “deliver” fractional ownership certificates in London bars? The total amount of Jun20 “deliveries” for this contract was…wait for it… EIGHT. Not 8,000 or even 800. Just EIGHT. It certainly appears that the global gold market immediately recognized this new contract for what it is…
So for gold, in summary, the physical delivery crisis continues unabated and it appears that COMEX will be under delivery distress for the foreseeable future. How many contracts will ultimately be filled in July? How many might stand in August? We’ll have to wait and see, but the ongoing spread between the Aug20 contract and the spot market indicates that this problem isn’t going away soon.
But here’s the interesting thing—and this is what typically happens when you open Pandora’s box—all sorts of unintended, unforeseen consequences follow. What do I mean? Well let’s check COMEX silver. Recall from late March, all of the headlines and stories about “logistical issues” and metal simply not being “in the right place” pertained exclusively to gold and NOT silver.
Similar to COMEX gold, I have delivery totals for COMEX silver dating back to 2015. The largest amount of monthly “deliveries” was in September 2019 with 8,722 contracts. The smallest was 1,356 in March of 2016. On average, a typical COMEX delivery month sees about 3,000-4,000 “deliveries”. But this has changed this year, too!
The month of May was a delivery month for COMEX silver, and the total amount of contracts actually delivered hit 9,044. While not a new record, this was still about 2X the historic average. And now the next delivery month of July has begun, and it looks to be a doozy.
When the contract went off the board Monday, June 29, there were still an incredible 16,834 contracts open and apparently “standing for delivery”! Not only is that about 4X the historic average, it also represents a delivery demand of 84,170,000 ounces of silver. While the COMEX vaults allege to hold over 320,000,000 ounces, only 90,648,055 ounces are currently marked as “registered” and available for immediate delivery. Though eligible silver can be converted into registered in a keystroke, the amount of silver needed for delivery certainly represents a problem for the Bullion Banks.
Will these Banks meet all of these delivery demands over the course of the month? Of course they will. But what will happen in September? Now that Pandora’s box is open, will silver follow gold and see an even higher number in each successive month? We’ll see.
One thing we do know, however, is that the CFTC continues to turn a blind eye to all of these shenanigans. For example, one might think that the chief U.S. commodities regulator might take an interest in the blatant abuse and disregard of their stated position limits. However, if one thinks this, one is demonstrably wrong. What do I mean?
The stated COMEX and NYMEX position limits were recently increased, and the press release can be found here: https://www.cmegroup.com/notices/market-regulation…
Please see the table below from James Anderson:
So we must wonder if any of the “Inspector Clouseaus” at the CFTC will even notice that on the first day of Jul20 COMEX silver deliveries, the House (proprietary) Account of JPMorgan is clearly in violation by issuing/delivering 5,975 contracts. Even with the recent changes, that’s still 2X the mandated position limit. Since you can be assured that no regulatory action will be taken, this is simply just another reminder that the rules only apply to you and me—and not The Banks.
One more thing on that chart above…be sure to note that the total amount of deliveries for the Jul20 silver contract is already 11,458. That’s nearly 3,000 more contracts delivered on THE FIRST DAY than the entire previous all-time high MONTH of September 2019!
So, anyway, let’s just conclude with this. Please do not rush out of here thinking that the COMEX will soon collapse. The weight of all this delivery demand may eventually lead to a force majeure-style failure, but that’s very likely not coming this month or next. The CME, the LBMA, and The Banks will work to protect their pricing scheme until the very last moment, so it would be foolish to think they’re going to meet a quick end.
However, their fate was sealed in late March, and like a dying animal, the spasms of their death throes are clearly visible…if you know where to look. To that end, I hope you found this post to be helpful.