The Zerohedge inspired alarm about the disparity between COMEX open interest (currently equivalent to 45.8 million ounces) and the amount physical gold registered as available for delivery against COMEX contracts, seems to have calmed down.
Since last week the predictable has happened. The holders of long and short positions in December that might require delivery in a couple of weeks, have started closing out and moving their positions into the February. Over the next two weeks I expect the open interest in December to fall from the current level of 194,000 to under 7,000. The current inventories registered with CME should be adequate to cover that.
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But I think that the fundamental issue of Zerohedge's misunderstanding and misrepresentation of the futures market still needs to be addressed.
So I have updated the data in the chart and added two additional plots to allow us to drill a little deeper:
- Total open interest (the purple line, and the data the Zerohedge focuses on); and
- The open interest in contracts beyond February 2016 (green line).
It is the second of these that is very interesting.
While December and February are jumping up and down as holders avoid delivery, contracts longer than February have remained relatively constant at just under 90,000 (21% of the open interest). I think that this gives us a window into uses of gold futures that isn't understood by Zerohedge.
What is really interesting about this block of contracts is that the turn over has been very low
during a period when the price of gold fell from $1,180 to $1,080. These are plainly not trading positions. There wasn't a massive scramble to get out. These are almost exclusively hedges.
So we can be confident that at least 21% of the open interest are intended to off set price risk in other markets. (What I can't demonstrate, but know from experience, is that a large portion of the open interest in December and February are held for the same purpose.)
So what are the hedges for?
The owners of these bought and sold contracts have holdings (short and long) in physical gold and OTC gold derivatives with price risks that they wish to off set.
For hedgers, COMEX is just a tool that provides easy exposure to price movements. Their primary interest is in their physical and OTC positions, and the prospect of COMEX delivery is just a nuisance to be avoided.
This is one of the key reasons why COMEX can match such large volumes of gold futures contracts with the prospect of only a tiny number ever going to delivery.
Afterthought: I often wonder why COMEX-CME continues to offer delivery on gold futures. A cash difference settlement contract would work just as well.
Cheers
