A primer on how physical gold stocks are held for Comex contracts, and what stock changes mean.
[This article previously appeared on BullionVault.com and is republished here with permission.]
There has been a lot of misinformation recently about Comex warehouse gold stocks.
Most notably, there's confusion about how this year's sharp drop in the quantity of gold bullion held in Comex warehouses might point to some looming shortage of metal to settle gold futures contracts, or even signal an outright default by sellers to buyers.
But there’s no mystery or hidden agenda of how Comex works. In this article, our goal is to explain how the Comex works in the simplest fashion. Having been involved in the physical gold markets for 30 years—both making and taking delivery on the exchange, as well as through off-exchange deals for miners, refiners, fabricators and investors—I hope I'm in a position to share a true "insider" view, the better to inform this debate properly.
First question: How does gold get into warehouse stocks of the futures exchange? Although it's a lengthy process, the answer is actually quite simple. Gold is recovered either from mine output or scrap jewelery and other products, such as bars and coins, at a refinery. The refiner then produces gold bars to the standard and specification of the exchange; in this case, the CME Group.
These gold bars belong either to the refiners themselves—meaning they have bought and own the gold—or they belong to the refiner's customers, who bought and owned the gold at the refinery, hiring it to make that metal into salable bars.
Now, for this particular refinery to deliver metal onto the commodities exchange, it must be a registered acceptable brand, such as Heraeus, Johnson Matthey or Metalor Technologies, to name a few.
Once these gold bars are produced, the metal must then be transported to the warehouse by exchange-approved carriers such as Brinks Inc., Via Mat International or IBI Armored Inc. There is no other way for the gold to get onto the exchange. Gold may move between Comex-approved warehouses, such as those operated by HSBC Bank, Brinks Inc. and ScotiaMocatta Depository. But any moves made between these warehouses must be made using the same approved carriers. No gold can enter the marketplace from outside of this refining loop.
Once gold is removed from an exchange-approved warehouse and held somewhere outside of this circle of integrity, there is no way for the CME exchange to guarantee the bar's quality. This means that once a person or investor removes bars from the warehouse, then to return them to the exchange, they would need to start at the beginning again. By going through the hands of the gold processor and refiners, this provides guarantee of the standard and quality of the material being delivered on the exchange.
So with the gold inside the warehouse, second question: When is the gold considered eligible or registered on the commodities exchange?
