After a lot of late-March huffing and puffing in COMEX markets to achieve a month-end close for spot gold below $1,300, trading in physical gold markets proved especially robust during the first week of April. To us, this suggests gold’s sub-$1,300 spot price is destined to be short lived.
A topic of longstanding interest in the precious metals space has been the interplay between paper and physical markets. Paper gold markets are best exemplified by exchanges such as COMEX, which trade high volumes of futures and options contracts, but very little tangible metal. In contrast, the world’s primary markets for physical gold are countries such as China and India, where buyers prefer to take possession of the bullion they are trading.
In our experience, gold price weakness tends to gain momentum in the highly levered (and traditionally gold skeptical) COMEX environment and is reversed by staunch demand in traditional physical markets. In this manner, global physical markets set lows for corrections in paper gold markets. Indeed, in evaluating the role of Western-type futures and options in global gold markets, it is instructive to highlight just how far removed COMEX trading actually is from anything having to do with physical bullion.
In Figure 1, we present annual figures for a few interesting characteristics of COMEX gold futures trading since 2010. From left-to-right in our table, we have listed: a.) annual COMEX gold futures volume in millions-of-contracts; b.) notional physical volume of these contracts in metric tons (tonnes); c.) total tonnage of bullion used in physical settlement of COMEX contracts; and d.) interpolated percentage of COMEX contracts settled physically.
Figure 1. Annual COMEX Trading Statistics, Shanghai Exchange Gold Withdrawals & Indian Gold Imports (2010-Present)
|Year||Contract Volume Millions (a.)||Notional Volume Metric Tons (b.)||Delivery Tonnage (c.)||% Physical Settlement (d.)||Shanghai Withdrawals (e.)||Indian Import Tonnage (f.)|
Source: Meridian Macro. *2/28/2019
During 2018, COMEX trading volume totaled 80.3 million contracts, or 249,772 tonnes, some 75 times global mine production. Amazingly, during the entire 2018 trading year, the total amount of physical gold utilized to settle expiring contracts was only 79 tonnes or less than 0.03% of traded contracts. For reference, physical bullion withdrawals from the Shanghai Gold Exchange during 2018 totaled 2,055 tonnes (Chinese imports, domestic production and scrap recovery) and Indian gold imports totaled 782 tonnes, together some 36 times COMEX physical deliveries during the year.
Pulling this all together, COMEX trading volumes can distort price trends in physical markets only for short periods, because lack of physical bullion to anchor this paper speculation (combined with perpetual time-value erosion inherent in futures contracts) always yields pricing equilibrium back to intractable inertia of physical stocks.
Given the negative slant to COMEX gold trading during the week of 3/25/19, we were especially curious to observe how physical markets would respond during the week of 4/1/19. We specifically cite the analysis of John Brimelow (JBGJ LLC) who monitors a wide array of price action in global physical markets on a daily basis. Brimelow pioneered the concept of Indian ex-duty premiums, a measurement of the premium paid by Indian gold importers in excess of the sum of global spot plus Indian import duties. Importantly, importing gold bullion into India currently incurs a duty of 10%, plus 3% sales tax, plus 0.3% in local taxes, for a total of import duty of 13.3%.
Using the median of Reuters A.M. price quotes for India’s five major gold-importing hubs (Mumbai, Ahmedabad, Chennai, Delhi and Jaipur), Brimelow had reported during the six days ended 3/29 that Indian ex-duty premiums had averaged $5.12. Following the COMEX drubbing, however, during the week of 4/1, Indian A.M. ex-duty premiums doubled to $10.05, an unequivocally bullish sign.
To put this in perspective, it is as if Indian gold buyers, who import more bullion than any other country in the world, sent a signal to COMEX gold bears, “Hey, just add $172 (in duties, taxes and premiums ) to the spot price of whatever you want to sell and send it over to us. We’ll take it all!”
This should be fun to watch.
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