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IPMI and Industry News: Gold Market News

Comex Is Turning Into A Physical Gold Delivery Hub

Thursday, September 10, 2020   (0 Comments)
Posted by: Matt Watson
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Comex Is Turning Into A Physical Gold Delivery Hub

Sep. 9, 2020 6:39 AM ET



Open interest in September gold at rollover deadline August 28 was 3,070, yet physical deliveries for September gold total 3,457 as of latest data September 4.

To me, this indicates that traders are buying spot September gold for the exclusive purpose of physical delivery.

This is what could be driving gold back into backwardation, where it has been stuck in real terms since around August 18 as measured by the gold basis.

Gold still looks to be near a selloff from a technical standpoint, so it will be interesting to see how physical deliveries respond to a discount if it comes.

Will September gold buyers increase purchases? If so, it will load the spring tighter for the next gold up-leg, which may be the last chance to buy below $2000/OZ.

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Comex gold futures are fast turning into a hub for physical gold delivery, and the weird action in September gold proves it. 2020 overall has already seen record physical gold deliveries, but ever since deliveries began for the September gold contract in particular, we have seen a critical and consistent anomaly in deliveries that we have not seen before.

By anomaly, I am not referring to quantity exclusively, though that is part of it. The September gold contract was never particularly active. Open interest – meaning the amount of contracts open – for September gold only peaked at around 3,000 contracts and remained near that figure for most of the month. By comparison, the current active December gold contract has an open interest of over 400,000, so the September gold contract should have come and gone without much fanfare. What is happening though that deserves attention is that physical deliveries are actually exceeding the amount of open interest in the futures contract at expiration, which came and went back on August 28.

My colleague Robert Kientz spotted this anomaly as well and believes that we may be dealing with a math error or what he calls "shadow contracts" on the Comex. (Disclosure: Most of this article was written prior to the publication of Kientz's analysis, excluding the parts referring to it of course.) I offer a different view, though his analysis is certainly worth reading.

Here's the anomalous data. Below is a screenshot from August 28 taken from the Comex website. That was the last day for September gold longs to roll over to the next futures contract in order to avoid either taking delivery or settling in cash. This is the day that September gold qua futures contract expired and became the spot gold contract.

September Gold Open Interest

As you can see, open interest on that day was 3,070. That means that 3,070 longs either had to take delivery or cash settlement at some point in September as the August spot gold contract expired and open interest fell to zero. No problems there, but look where deliveries for September gold are as of September 4:

September Physical Gold Deliveries

Deliveries broke the 3,070 open interest mark on September 2 and they are still rising. How is this even possible?

September Spot Gold Longs Are Buying To Take Delivery

This is only possible under two conditions:

  1. There are still active buyers and short sellers in September spot gold, and
  2. These active buyers are taking physical delivery nearly immediately for those positions.

There is still daily trading in September spot gold, so check on #1.

The number on the left, 607, is trading volume for the spot September contract on Thursday, September 3. These 607 could either be existing contracts changing hands, but they could also include new spot contracts opening. Looking through the Comex rules on open interest, I can see no indication that selling short new spot contracts after futures expiration is prohibited. The only prohibition is that a spot contract cannot be opened and then rolled into a later futures contract to avoid delivery. When a trader sells a spot contract short, that trader commits to either delivering or settling in cash with the buyer that same month. Only a futures contract can be rolled over into another futures contract. Spot contracts must either settle or take delivery that month.

Anyway, as you can see above, there were 59 deliveries, which means open interest should have fallen by at least 59, but instead it actually rose by 260. I personally do not believe this is either a math error or somehow representing shadow contracts, but rather simply new spot contracts opening. 260 + 59 = 319 spot September contracts opened that day, and we know from the Comex delivery report above that 274 more deliveries were taken the next day on September 4. Meaning, 274 of those 319 new contracts stood for delivery the very next day after they were ostensibly bought. This sort of unusual circumstance where the fall in open interest was less than deliveries taken has actually been standard for the September contract every single day since deliveries began:


Open Interest Change


August 31




September 1




September 2




September 3




September 4




Excess deliveries total:


487 contracts are about 1.4 tonnes of gold. This might seem like nothing more than a weird oddity now, and it is, but there is evidence that physical demand is already having a real measurable effect on the gold futures curve.

Deliveries May Be Forcing Gold Back Into Backwardation

What kind of effect exactly? While I do not know if this is causal or just correlative, the gold market has been in backwardation in real terms since around August 18. Backwardation is when spot gold is more expensive than the nearest gold futures contract (in this case October), which indicates strong physical demand.

The degree of backwardation is measured by something called the gold basis, or the difference in real terms between spot and the nearest futures contract. Normally backwardation indicates a physical shortage, but since gold is primarily a monetary metal rather than industrial, there is no such thing as a physical gold shortage, so backwardation in gold more accurately indicates demand to exit dollars as a monetary asset.

Around about August 18, the gold basis went negative in real terms, pushing the gold market into backwardation by this measure. The gold basis is calculated by dividing the premium for the nearest gold futures contract by gold carry costs. If the premium is less than carry costs, gold is in backwardation. The chart below from Monetary Metals shows what’s happening graphically. The basis is the blue line, the cobasis being its inverse in red. The green line is the gold price.

The current backwardation in gold makes perfect sense in the context of physical deliveries exceeding closing September futures open interest. There are still three and a half weeks for September deliveries to complete, and each delivery indicates another buyer of September spot gold for same-month delivery.

Another interesting question is who is supplying these spot contracts? My guess is it is the swaps again, the bullion banks, because they have no choice. The swaps know that those buying spot gold want physical gold. The swaps have no choice but to sell the contracts, because if they don’t, then the price for spot gold on the Comex will push even higher above futures prices for lack of sellers, which would force the gold market into even deeper backwardation. This, in turn, would attract more gold speculators, making the bullion banks already near-record short position in dollars, even more precarious.

Gold COTs, Bullion Banks Increase Short Positions Further

Speaking of bullion bank shorts, that latest commitment of traders [COT] reports for August 31 confirm that the bullion banks are still stuck in their short positions, which have increased by 6,160 contracts to 179,546. At $1,924 per ounce and 100oz per contract, that’s a $34.5B net short position, right near the record high of $35 billion at the beginning of August.

At the same time, the other and non-reportable long positions are steady at record highs, up 68 contracts net since last week. (Add up COTLC [S] and COTDLC [O].) Gross longs between the two categories is 228,294, also a record high.


I believe it is these two trader categories specifically that are responsible for ongoing September spot deliveries at the Comex above closing open interest at September futures expiry. According to the CFTC, there are only 132 traders in the Other Reportables category that are holding long positions. I believe these are the ones driving physical demand now and pushing gold into backwardation. Numbers for how many non-reportables hold positions are not available.

An increase in gold deliveries of 310x since 2018

Finally, a bit of a wider perspective on gold deliveries. In 2018, only 0.02% of all gold open interest was settled through physical delivery. In 2020 year-to-date, 172,075 contracts have been physically delivered against a total 2,448,323, for a delivery ratio so far of 6.2%. That’s 310x more deliveries per contract than for 2018. This is a rough estimate calculated by adding together the open interest figures at each futures contract expiration from December 30, 2019 until August 28, 2020. However it is calculated exactly, the idea is physical deliveries have definitely stepped up significantly, and it looks like that trend is intensifying as gold moves into backwardation.

How Will Deliveries Respond to A Technical Gold Selloff?

Still, none of this means that gold won’t correct in the short term. The steep upward trend line established back in March is being tested again, and has already marginally broken to the downside. If it fully breaks, a short-term selloff in the gold price looks likely despite high physical demand at the moment.

What will be very interesting to see is how deliveries respond to such a correction. If they step up still further on any discount, then a short-term correction could bring gold even deeper into backwardation, loading the spring tighter for the next up-leg in gold. If we see a significant correction from here, I will be adding to my gold positions. If deliveries do step up further, this might be the last opportunity to buy gold below $2,000 in our lifetimes.

Open interest in October gold, the nearest futures contract, remains above 60,000. October not being the active contract, there is a higher chance that a greater proportion of this open interest will hold to delivery than the active contract, which is crowded by paper gold traders less interested in physical gold. The record for physical deliveries in a month came in May at 55,102. Could we see a new record for October? And how high will September spot deliveries go? And what about the active December contract with over 400,000 contracts open?

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