All is not well in the Gold paper markets

London Bullion Market Association (LBMA) officials have loudly proclaimed there are plenty of gold bars in LBMA and COMEX vaults to meet surging demand from buyers.

Unfortunately for them, confidence is particularly fragile these days and cracks are starting to appear. 

Which is why anxious officials there issued not one, but two memos last week in an attempt to reassure traders.

It’s interesting the LBMA, along with the COMEX, felt a need to put out back to back statements. If inventories are plentiful, both exchanges should be busy delivering gold, on time and without delay. The best way to build confidence is simply to meet buyers’ expectations.

The trouble is these expectations are not being met, and officials blaming disruptions related to COVID-19. There are, for example, not enough 100-ounce gold bars in the U.S. to cover demand from those standing for delivery on COMEX futures contracts.

The reason offered is that the Swiss refiners who normally convert 400-ounce bars stored in London to 100-ounce bars needed in the U.S. are temporarily closed. There has also been difficulty in arranging air transport of the gold.

This sounds plausible, but it does not explain a more fundamental problem. Bullion banks sold way more paper 100-ounce bars than they can actually deliver. While there may be lots of physical gold in London, there isn’t enough deliverable gold in U.S. based COMEX vaults to meet delivery demands.

U.S. investors standing for delivery on a contract shouldn’t have to rely on inventory stored in London vaults.

Yet that is exactly what they will have to do. The COMEX changed the terms of their gold futures contract. Now bullion banks can meet delivery requirements with 400 oz bars in an LBMA vault stored overseas.

U.S. buyers might not like getting a partial interest in a 400 oz bar vaulted in London instead of a 100-ounce bar they can take actual possession of here in this country. That is tough luck for them and great news for bullion bankers on the verge of default.

Perhaps the joint statement issued by LBMA and COMEX officials on April 1st was an April Fool’s joke. They claimed a “near record” 8,326 tonnes of gold are stockpiled in LBMA vaults – the equivalent of 666,045 400-ounce bars.

However, they published an inventory number from 3 months ago instead of the current stocks... suspicious to say the least. They also didn’t explain that a large majority of the stored gold is not available for delivery at this time. The vast majority of that gold belongs to the Bank of England, other central banks, and ETFs.

Metals analyst Ronan Manly estimates the actual amount of gold available for delivery is less than 500 tonnes – at least at the current gold price.

Craig Hemke, of TF Metals Report, points out just what a paltry amount that is. The “CME/COMEX posted a total of 290,847 ‘Exchanges for Physical.’ That's a total of over 29MM ounces of gold or NINE HUNDRED METRIC TONNES!!!”

In other words, the LBMA vaults may only have about half of what is needed to cover COMEX “Exchanges for Physical” in London, let alone what is needed by the LBMA directly. Keep in mind, these numbers are just from the first three weeks in March.

It is starting to look like a lot of speculators who hold paper gold and hope to redeem that for actual bars could be disappointed.