It’s rare that we publish investor alerts. In fact, we’ve probably only alerted investors to potential issues a few times in the history of our company. However, we would be remiss if we didn’t bring to the attention of our readers a potential dire situation in the gold futures market. Most of the information that we share below is from a recent Zerohedge article, but we also provide some analysis that may help to put the situation into perspective.
According to this article from Zerohedge.com, the outstanding gold futures contracts or aggregate gold interest at the moment is roughly 43.5 million ounces. At the current gold spot price of $1,105 an ounce, the total value of the outstanding contracts clocks in at approximately $48 billion. Historically, COMEX has been leveraged approximately 19 to 1. This means that if COMEX had an average amount of eligible gold on hand to meet requests for physical delivery, they would have approximately 2.3 million ounces. In an ideal world, the number of outstanding gold futures contracts would be completely bullion-backed, but since the ratio has been relatively stable at 19 to 1, there has been little cause for concern.
Most readers would be shocked to learn that on or about August 3rd, COMEX had the lowest amount of eligible gold for physical delivery ever at 351,000 ounces. This means that COMEX was leveraged at nearly 124 to 1, which puts it in the same stratosphere as many tech companies during the Nasdaq bubble and subsequent crash in the late 1990’s. If that wasn’t bad enough, due to a recent large delivery made by JP Morgan, their current holdings available for physical delivery are less than 20,000 ounces. This, in turn, reduced the total holdings by the COMEX bullion banks to a record low of 202,000 ounces for delivery. When compared against the aggregate gold interest of approximately 43.5 million ounces, we are stunned to realize that the gold futures market (at least with respect to eligible gold for physical delivery) is leveraged at 215 to 1. This appears to be a house of cards that could collapse at any time.
While we realize that it’s always difficult to sell while prices are down, such as is the case at the moment, the alternative is to hold on to your current shares and hope that the gold futures market doesn’t collapse. Of course, the m0re people that get wind of the current COMEX situation and understand the risks, the more requests for physical delivery will be made, which will cause COMEX to change their policies with respect to settling contracts in gold bullion or possibly even shut down altogether! If either situation occurs, the gold futures price will tumble, which will cause a major decoupling between the gold futures price and the price for physical gold bullion and coins. In fact, under this scenario, we would expect for the price of gold coins and bullion to soar, along with premiums.
Considering the above, we strongly recommend exiting your gold futures position and investing in physical gold coins and bullion. We believe that it’s only a matter of time before COMEX shutters its doors or restricts the settlement of gold contracts via physical delivery.