Should We Be Concerned About CME Gold Future Contracts

The Market Gage - Dillon Gage's Precious Metals Newsletter

Do you believe that everything you read on the Internet is true?

Well, one thing that gets a lot of Internet press (from time to time) is the CME Gold future contract open interest figures and what would happen if everyone stood for delivery at once. Looking at the open interest figures as of Thursday, the only thing we should be concerned about is NOT the TOTAL open interest on the CME GOLD contract for all the future months, but the spot month only.

Currently CME warehouse stocks stand at 2,549,000 troy ounces registered and 8,144,000 troy ounces eligible.

Eligible gold holdings in an authorized CME Depository conform to the CME requirements of size, purity and brand. Registered gold holdings are the same as eligible holdings, BUT registered status means the metal can be delivered to offset one’s short position in the spot delivery month.

In my opinion, the only reason you would want to put metal as eligible and not registered is, as eligible the storage rates are negotiable with the depository. Whereas registered has a fixed rate published on the CME website, eligible material can become registered with just a call to your depository and in normal circumstances can be changed in a few hours.

If we look at October and November open interest, we see small quantities as these two months are not considered big delivery months. December will be the next big delivery month and, as of Thursday morning, December showed an open interest figure of 394,226 contracts equaling 39,422,600 troy ounces of gold.

I guess looking at these open contracts, one can paint a picture of gloom and doom as if no contracts were rolled. No need to worry, here’s why. If anyone one looks at the gold deliveries in any big delivery month such as December, historically, it’s always the same old story. Less than 2 percent of the total contract stands for delivery and the rests gets rolled and in the end it’s never ever a concern as the crazies on some of the blogs report. The sky isn’t falling on the ability for the CME to meet its obligations.

Without getting into specifics, in the event that the warehouse stocks ever get to a level of concern for the folks at the CME, the CME has some stop gap tricks up their sleeves to limit the amount of contracts one can hold going into the delivery month. As a precious metals trader for over 40 years, I cannot remember any instance that the exchange was in jeopardy of not delivering on all the metal that stood for delivery in a spot month. One can never say never, but the CME has an unblemished track record.

So when you read on the internet the reports that you better hurry up and buy your physical gold and silver before there is none around, just hit the delete key and move on.

Have a wonderful Friday

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.