Tag Archives: London

Gold In London & Hong Kong Is Used To Settle COMEX Futures

Physical gold located in Hong Kong and London is used to settle COMEX gold futures contracts through “Exchange For Physical” trading in the over-the-counter market.

This post is a sequel to Understanding GOFO And The Gold Wholesale Market and COMEX Gold Futures Can Be Settled Directly With Eligible Inventory – in which Exchange For Physical (EFP) trading is explained and how it can increase or decrease open interest at the COMEX. If you’re new to this subject it’s advised to first read my previous posts.

Most gold analysts surmise COMEX 100-ounce gold futures contracts (GC) can only be physically settled through taking and making delivery. This is technically true when excluding the possibility of EFP trading in GC through the over-the-counter (OTC) market. While on Exchange trading in GC is “executed openly and competitively”, trading GC in the OTC realm (and thus the price of the gold, its form and location) is a “privately negotiated transaction” between buyer and seller. The COMEX is a subsidiary of CME Group, which offers its clients OTC trading on a platform called ClearPort.

Because the COMEX in New York is the most liquid gold futures exchange globally – offering precious metals futures denominated in the world most used currency the US dollar, gold industry participants use GC for a variety of reasons, including hedging metal held outside the contract’s deliverable geography. Subsequently, the contracts can be physically “settled” anywhere at any price through EFP.

In EFP two parties sign a futures contract (short and long) and simultaneously execute a reverse spot transaction (buy and sell). One side sells short the futures contract and buys spot gold (the spot leg is referred to as the related position by CME), while the other buys long the futures contract and sells the related position. EFP trading can increase the open interest, decrease the open interest, or not change it, depending on the existing positions held by both parties before they enter into an EFP transaction. When EFP decreases the open interest the phrase “settle positions” is applicable. Another way of saying it would be “offsetting positions” or “netting out positions”.

Let us have a look at a real life example. The next picture was sent to me by data wrangler and gold specialist Nick Laird (website Goldchartsrus.com). It’s taken from the book The Prospect for Gold: The View to the Year 2000 by Timothy Green. In the excerpt the author describes how the Russians sold their gold in Switzerland during the eighties.

Exhibit 1.

This example matches my previous one regarding EFP (hedging metal held outside the contract’s deliverable geography). Any bullion bank, miner or refinery can sell short on COMEX and when the gold needs to be physically “settled”, for example in Switzerland, the short position can be unwound through EFP. The only requirement is that “the quantity of the related position component … must be approximately equivalent to the quantity of the Exchange component” – meaning the spot leg must be more or less 100-ounces of gold, which is the underlying asset of GC. In this example the GC short holder connects through CME ClearPort to Exchange For Physical. In the EFP transaction he will buy long a futures contract and simultaneously sell spot. His long and short will then be netted out while he sells spot the physical in Switzerland. Effectively, a COMEX short has been physically settled outside the contract’s deliverable geography. Naturally, a long position can also be unwound in Switzerland, which is then the other side of the trade.

EFP Moves Kilobars Through CME’s Hong Kong Vaults

In March 2015 CME launched a Gold Kilo Futures contract (GCK) physically deliverable in Hong Kong, but ever since implementation there has been poor participation in this instrument. From the start GCK trading volume has been close to nothing and deliveries rarely occur. Notwithstanding, there are massive volumes of kilobar gold flowing through the CME approved warehouse in Hong Kong owned by Brink’s, Inc.. On average 3.9 tonnes per day are withdrawn from this vault, but sometimes daily withdrawals are as high as 20 tonnes.

Exhibit 2. CME Kilobar delivery volume is so low it’s not visible.

Because volume and delivery for GCK on Exchange is so low, the withdraws must be explained by OTC trades. A CME representative actaully confirmed this to me; the physical movement through the Hong Kong vaults is caused by EFP transactions.

But if we look at the GCK volume page we can never observe any EFP trades being disclosed. In contrast, EFP volume of GC is substantial. Can it be gold kilobars in CME’s approved warehouses in Hong Kong are used to settle the 100-ounce futures contracts? Yes.

The underlying asset of GC is “either one (1) 100 troy ounce bar, or three (3) one (1) kilo bars, … with a weight tolerance of 5% either higher or lower, … [assaying] to a minimum of 995 fineness”, the underlying asset of GCK is “one kilogram bar (32.15 troy ounces) … [and] shall assay to a minimum .9999 fineness”. It’s thus within the indicated confinements on EFP trading that the 100-ounce gold futures contract is physically settled with three kilobars in Hong Kong.

My theory is that kilobars bought by bullion banks in the West, for example at Swiss refineries, to be consigned to China are hedged on the COMEX and once the gold arrives is Hong Kong the shorts are unwound through EFP. From there the gold is transported by armored truck to Shanghai Gold Exchange designated warehouses in Shenzhen by Brink’s that has a cross-border logistics license from the Chinese government. Supportive to my theory, see exhibit 3 below. Notice the strong correlation between “gold import into Hong Kong versus kilobars received in CME’s vaults” and “re-export from Hong Kong versus kilobars withdrawn from CME’s vaults”.

Exhibit 3.

The correlation points out most gold moving through Hong Kong, which is headed for China, is in kilobar form and moves through CME’s vaults. And because most of this throughput is EFP related, I assume the kilobars are used to settle COMEX futures.

It’s hard to test if my theory is accurate because EFP transactions are executed in the OTC realm and little information is available. Possibly, al throughput in Hong Kong is EFP related but doesn’t impact the GS open interest. If anyone has a different theory please comment below.

London Gold Offsets COMEX Futures

We’ve established gold in Switzerland and Hong Kong is used to “settle” gold futures. But there is also proof gold in London is used to phase out positions on the COMEX. When researching this topic I reached out to William Purpura who is, inter alia, Chairman at Northport Commodities, member of the COMEX Governors Committee, and previously traded on the COMEX floor from 1982 to 2007. I asked Purpura for an example of how EFPs are used. He replied [brackets added by me]:

Most of it [EFP] is done by bullion banks. … It’s mainly for netting out. Lot’s of times London versus New York. You see lots of EFPs posted around 8am in New York on COMEX.

There it is, “London versus New York”, and, “netting out”. From this quote we learn loco London gold is used to execute EFPs to wash out New York futures positions. One can argue the related position in London is “unallocated” – I’m not sure. In the latest formulation by CME on EFP (Market Regulation Advisory Notice RA1311-5R) it’s stated:

Where the related position component … is a physical transaction … the transaction should be submitted for clearing as an EFP transaction type.

Often in wholesale gold market parlance physical is also used for “unallocated gold”, which is not exactly physical in my opinion.

I’m sure there are many more methods than I’ve mentioned to use EFP, or any other privately negotiated transaction (PNT) available on ClearPort, that influences the open interest at the COMEX. One thing is for sure, conventional delivery is not the only way to terminate futures positions. In the gold futures rulebook this is explicitly noted by CME Group. The excerpt below is about terminating a gold futures contracts [brackets added by me].

113102.E. Termination of Trading

No trades in Gold futures deliverable in the current month shall be made after the third last business day of that month. Any contracts remaining open after the last trade date must be either:

(A) Settled by delivery which shall take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but no later than the last business day of the delivery month.

(B) Liquidated by means of a bona fide Exchange for Related Position [/EFP] … .

This is important for our comprhension of the global paper and physical gold market. COMEX gold futures delivery statistics are not all there is to it.

H/t Ronan Manly, Bron Suchecki, Nick Laird from Goldchartsrus.com

New York And London Gold In Backwardation

Not often in financial markets is the future price of gold is lower than the spot price (live), but lately we’ve witnessed such an event in both the New York and London gold market. This is called backwardation, the opposite of contango.

What causes backwardation and will it increase the price of gold? In my opinion there are two possible scenarios: the market expects the gold price to fall in the future, or there is scarcity now.

Before we dive in let’s get a better understanding of this subject. Below is a visual interpretation of backwardation. I’ve drawn a graph that resembles the futures curve on the COMEX (New York) 15 September 2015. You can see that the price of gold 1-MONTH, 2-MONTHS and 3-MONTHS out is lower than the SPOT MONTH.

COMEX backwardation
Source CME.

On 15 September the London (Over The Counter – OTC) forwards curve looked like this:

London backwardation
Source CME.

Both graphs do not show the full-length futures/forwards curve, only the first six months.

Just to be sure, let’s read the definition of backwardation from both trading platforms. From COMEX:


Market situation in which futures prices are lower in succeeding delivery months. Also known as an inverted market. The opposite of contango.

From the London Bullion Market Association:


A market situation where prices for future delivery are lower than the spot price, caused by shortage or tightness of supply.

Current market conditions exactly fit the description from the LBMA and COMEX, there can be no confusion, what we see in the graphs is backwardation. Oddly, CPM Group released a Market Commentary (The Non-Existence Of A London Gold Forward Backwardation) on 14 September 2015 stating gold is not in backwardation. From CMP Group:

Since 2009 the CME Group has operated a system allowing for London over the counter forwards to be cleared through the CME Clearinghouse, and publishes a daily curve of Cleared OTC London Gold Forwards. Few London forwards actually are cleared via CME’s contract, but the CME gathers actual forward quotes from banks and dealers every day and publishes a forward price curve based on these actual quotes,…

These quotes [page 2] show a clear positive forward carry, or contango.

The quotes (prices) CPM attached to the document are from 11 September 2015 and are clearly in backwardation. Why CPM denies the obvious signs of backwardation is beyond me.

The Market Expects The Gold Price To Fall In The Future 

Scenario one: at the same time we’re watching Western gold markets, an interesting event is unfolding in iron ore futures at the Chinese Dalian Commodity Exchange (DCE). These futures are trading at a severe discount to spot prices.

DCE iron ore futures

Does this signal scarcity or is the market expecting the price of iron ore to fall? China is the largest consumer of iron ore worldwide, but its economy is slowing down. Consequently, demand for iron ore is clearly dampening and if the market thinks the price of iron ore will decline in the future, the price of corresponding futures contracts will go down. This could be the case for gold as well.

Gold Is Scarce Now

Scenario two: the market does not expect the gold price to fall, and there is less supply than demand now. This results in the spot price to be pushed up relative to bets (contracts) in the future.

If bid/ask spreads allow it, in theory owners of physical gold located in New York or London can strike a profit by selling metal spot, while simultaneously buy back the gold at a lower price through a futures contract – in New York on the COMEX or through a forward contract in the London OTC market. Over time, when the futures/forward contract matures and the gold is returned, the initial owners have the same amount of gold as before but for a lower price than they sold it for. The profit is fiat currency (US dollars).

One reason why gold futures prices are normally higher than spot (contango) is because it costs money to store gold into the future. In addition, if gold futures decline relative to spot the arbitrage opportunity just described would increase spot supply and future demand, and thus push the market out of backwardation.

While witnessing backwardation, registered gold inventory at the COMEX available for delivery has diminished to a mere 5.1 tonnes. Are backwardation and a declining inventory related? I would say they are.

Picture COMEX gold inventory
Courtesy Sharelynx.com. Registered stocks have fallen significantly. Eligible stocks can be switched to registered, though gold futures traders on COMEX own not all eligible stocks, it can be industry professionals just using COMEX designated vaults for storage.

Actually, I think backwardation and contango cause inventory to go down and up, because of the cash and carry trade. First, the situation how contango increases inventory: when there is a steep enough contango futures curve all prices in the future are significantly higher than spot. An arbitrage opportunity arises where traders can borrow USD funds, buy spot gold and store it (in a COMEX vault) to sell through a futures contract at a higher price. If the difference between the spot and the future price over period X is higher than the interest to be paid plus the cost of storage over period X, it becomes profitable to cash and carry.

For example, simplified: the spot gold price is 1,000 USD per ounce, the one-year gold futures price is 1,050 USD per ounce, the cost to store 100 ounces of gold for one year is 900 USD and the USD interest rate (LIBOR) is 0.5 %. Paul borrows 100,000 USD at 0.5 % and buys 100 ounces of gold to store at the COMEX. At the same time he sells short a 100 ounce futures contract at 1,050 USD per ounce. Paul’s total costs are, 500 USD interest and 900 USD storage costs, equals 1,400 USD. His revenue is 5,000 USD, as he will receive 105,000 USD for the gold in one year that he bought for 100,000 USD. 5,000 minus 1,400 USD, is 3,600 USD in profit.

Contango can cause inventory to increase, whereas a lack of contango unwinds inventory. Also, during backwardation a reversed cash and carry trade arises: borrow gold to sell for USD and buy long a futures contract to settle the debt when the gold loan matures. The price of the futures contract would be lower than that of the gold borrowed. Whenever demand to borrow gold increases, the gold lease rate (GLR) goes up, which is exactly what happened recently.

Now we can see how GLR and LIBOR are related and how LIBOR can affect the gold futures curve. If LIBOR is lower than GLR there is gold backwardation, if LIBOR is higher than GLR there is contango. Hence…

LIBOR – GLR = Gold Forward Offered Rate (GOFO) 

We could say, negative GOFO signals scarcity in the gold market. Unfortunately the LBMA ceased publishing GOFO rates with effect from 30 January 2015 “following discussions between the LBMA and … Market Makers”. Ironically, GOFO rates went dark right after dipping into negative territory in 2013 and 2014.



Remember exactly a year ago when silver inventory at the Shanghai Futures Exchanged (SHFE) had decreased from over 1,100 tonnes to below 100 tonnes?

SHFE backwardtion inventory

Indeed, when silver on the SHFE was in backwardation there was scarcity in the Chinese silver market and the price in Shanghai ran up relative to the international price. Only after SHFE silver backwardation flipped into contango inventory came of its lows.

Currently there is said to be scarcity in gold in the market. Which of the two scenarios described above is true will be exposed in the future!

It’s virtually impossible to get physical gold in London

Just after my colleague Ronan Manly wrote a very extensive article on how much gold is left in London (not much), Petropavlovsk Chairman and Co-Founder Peter Hambro discusses gold at Bloomberg Television. He, like Manly, concludes there is very little physical gold left in London. From Mr Hambro:

My baseline is they [the Chinese] have been buying and the Indian have been buying in enormous quantities. It’s virtually impossible to get physical gold in London to ship to those countries. We get permanent requests from Russia, would we please sell our physical gold to India and China. Because there is no physical, only endless promises. And I really worry that the market, that paper market, could be stamped on and people will say “sorry we’ll have a financial close out”, and it’s all over.

Perhaps this quote explains why UK gold export directly to China in June was not a net outflow from the UK – because there is little gold left in London (Manly, Hambro) and thus the UK had to ramp up import from the US in June to send forward to China.

Screen Shot 2015-09-10 at 9.46.56 am

Click here to watch the full interview with Mr Hambro.

The Financial Times reported on similar gold shortages in London. From the FT (2 September):

The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.

“[The rise] does indicate there is physical tightness in the market for gold for immediate delivery,” said Jon Butler, analyst at Mitsubishi.

I’ve also asked BullionStar CEO Torgny Persson in Singapore what he’s currently seeing in the precious metals markets. He replied there are shortages in both the gold and silver market. From Mr Persson:

Several refineries, mints and wholesalers are reporting that they have no gold and silver at all live available, that they have stopped taking orders for many different products. 

We still have most products in stock because we stocked up as massively as we could in the last weeks but for many products, we are unable to replenish as of now when we run out.

Big squeeze with shortages starting now both on the wholesale/retail level and at the bulk level… Unless the paper price is reverting up, it may not subside this time around and then the paper fiat mess (including paper prices of gold and silver) is in trouble. If it goes to the point of shortages at the bulk level like 1kg gold bars and 1000 oz silver bars, the emperor will stand without clothes.

To be continued…

Bank Of England Custodian Gold Drops 351t

The Bank Of England (BOE) has recently released its annual report in which it’s disclosed the gold held in custody for a range of customers was 5,134 metric tonnes on February 28, 2015, down 351 tonnes (6 %) form the previous year. 

The data on gold in custody at the BOE is disclosed in billions of Great British Pounds. The annual report states the BOE’s custodian gold was worth £130 billion on February 28, 2015. Because the data is disclosed in round numbers the derived tonnage is an estimate.

BOE custodian gold
Exhibit 1.

The BOE isn’t a member of the LBMA, but members of the LBMA hold gold in custody accounts with the BOE – next to foreign central banks and international financial institutions.

Let’s throw in some more numbers that are publicly available to get a bette handle on gold stored in London and to see if we can figure out how much gold is left in London:

Since January 2015 the LBMA website claims the total gold stored in London is 7,500 tonnes of which three quarters is stored at the BOE vaults. We’ll use 5,625 tonnes as an estimate for gold held in custody at the BOE on February 28, 2015.

From the Internet Archive it can be seen the same website claimed in April 2014 there was 9,000 tonnes in London of which two thirds was stored at the BOE. We’ll use 6,000 tonnes as an estimate for gold held in custody at the BOE in custody on February 28, 2014.

Gold from the GLD ETF is also stored in the LBMA system, at an HSBC vault located within the M25 London Orbital Ringway (typically LBMA vaults are within M25 to limit transportation and security costs), but this is all outside the BOE vaults.

The BOE could be a subcustodian for HSBC, as can be read in the GLD prospectus:

Gold bars may be held by one or more subcustodians appointed by the Custodian [HSBC], or employed by the subcustodians appointed by the Custodian, until it is transported to the Custodian’s London vault premises [the HSBC vault].

However, it’s likely in February there was nil GLD gold held by a subcustodian. From the prospectus:

As at March 31, 2015, the Custodian [HSBC] held 23,702,920 ounces of gold on behalf of the Trust [GLD] in its vault, 100% of which is allocated gold in the form of London Good Delivery gold bars with a market value of $28,135,365,641 (cost — $29,341,051,196) based on the LBMA Gold Price PM on March 31, 2015. Subcustodians held nil ounces of gold in their vaults on behalf of the Trust. 

GLD was holding 771 tonnes on February 28, 2015, and 804 tonnes on February, 28, 2014.

Next is an overview of the estimates we just talked about:

LBMA system estimates Feb 2015
Exhibit 2.
  • ‘tonnes at BOE’ is the data from the BOE annual reports
  • ‘LBMA’ is the data from the LBMA website
  • ‘LBMA gold at BOE’ is derived from the data from the LBMA website
  • ‘LBMA gold outside BOE’ is ‘LBMA’ minus ‘LBMA gold at BOE’
  • ‘LBMA gold outside BOE minus GLD’ is exactly what is says it is

What can be seen is that ‘tonnes at the BOE’ and ‘LBMA gold at BOE’ roughly corresponds. It can be that, ‘LBMA gold at the BOE’ includes foreign central bank gold, or put differently; foreign central bank gold at the BOE is maybe counted as gold in the LBMA system. I will further investigate this possibility.

It’s hard to say how much gold foreign central banks store at the BOE, but according to my estimates it is at least 2,000 tonnes – based on data from the central bank of the Netherlands (123t), Austria (230t), Germany (441t), Australia (80t), Switzerland (208t), Sweden (61t), Finland (25t), Belgium (±200t) and India (±250t) in addition to the IMF (±450t).

Let us assume foreign central banks store 3,000 tonnes at the BOE. This means the floating supply of London Good Delivery bars at the BOE is:

5,134 (annual report) – 3,000 (foreign central banks) = 2,134 tonnes

‘LBMA gold outside BOE minus GLD’ (exhibit 2) = 1,104 tonnes

Summed up, there is an estimated 3,238 tonnes of floating supply in London. This excludes GLD and gold stored by foreign central banks at the BOE.

LBMA estimates Feb 2015
Exhibit 3.

This post will be continued.

Are The London Gold Vaults Running Empty?

As I have extensively covered in the past months the majority of the unprecedented demand for gold from China, which started in January 2013, was being supplied by the UK, home of the London bullion market and many bullion bank (and private) gold vaults. Via Switzerland, where the gold was remelted into kilobars, it was shipped towards Hong Kong where most of it was re-exported to China mainland. Whilst in 2013 it was clear that the world’s largest gold-backed ETF, GLD, was the predominant supplier from the UK, since January 2014 GLD inventory has more or less stabilized.

GLD gold inventory

But UK gold export at the time remained elevated. In January 2014 the UK net exported 143 metric tonnes of gold (118 tonnes net to Switzerland), in February net export accounted for 107 tonnes (119 net to Switzerland). This gold must have been fully supplied from other vaults than GLD’s, which raises the question; how much floating supply is there left in London. I believe there is still a lot of physical gold in London (I will do a future post on some estimates), but I don’t know how much of this is floating supply.

Let’s head over to the east and see how much physical gold China has imported year to date, based on official trading statistics. If we look at the trade stats from Hong Kong we can see net export to the mainland in January was 89.7 tonnes, in February it was 112.3 tonnes and in March 85.1 tonnes. The amount that crossed the border in March was down 24 % from February, but still strong – 85.1 tonnes annualized is 1021.2 tonnes. The total in Q1 accounted for 287 tonnes, annualized 1148 tonnes (just to give you an idea).

Hong Kong - China gold trade monthly 3-2014

As we all know by now Hong Kong is not the only port through which China is importing gold. Though the Chinese are reluctant to disclose their gold trade numbers – guess why that is – from the trade statistics of other countries we can see a portion of how much gold officially vanishes in the black hole (China’s strong hands) not to return in the foreseeable future. Switzerland, where 70 % of the world’s gold refining capacity is located among four refineries, has been so kind to publish monthly reports on whom they trade gold with, and how much, since January 2014. The Swiss net exported 12 tonnes to China in January, 36.9 tonnes in February and 26 tonnes in March. If we add up Hong Kong and Switzerland net export to China in Q1 the outcome is 362 tonnes, annualized 1448 tonnes (just to give you an idea). Remember, this is only from two countries, it doesn’t include the kilobar shippings from the Perth Mint to China for example. Chinese gold import in Q1 has definitely been more than 362 tonnes – also because the official trade numbers I’ve used for this post do not include monetary gold, PBOC purchases will not show up in these stats.

It’s remarkable that Chinese net import in March, at least 111.1 tonnes (85.1 + 26), hasn’t been sourced from London, as it has been in the past year. UK total net gold export in March collapsed 85 % m/m from 107 tonnes in February to 16 tonnes in March, net export to Switzerland fell by 72 % from 119 in February to 34 tonnes inMarch. 

UK Gold Trade 2009 - march 2014

The main gold vein, as I’ve called it, that ran from the UK, through Switzerland, through Hong Kong finally reaching the mainland, is drying up. Switzerland net gold export to Hong Kong fell 76 % from 97.9 tonnes in February to 23.9 tonnes in March, according to Swiss customs.

Switzerland gold trade March 2014

In the coming months I’ll be watching very closely if any more gold will be squeezed out of London and how Swiss exports to Hong Kong and the mainland will evolve. I believe the largest floating supply is/was in London, it will be decisive for the gold market if these stocks are gone. Additionally I will search more customs databases to get hard numbers on gold export to China mainland.

The following video was broadcasted in December 2013. Kenneth Hoffman states that the London gold vaults were virtually empty at the time. Are the last bars being moved out at this very moment? The managing director of Switzerland’s biggest gold refinery stated this is exactly what is happening.

Because net export from Hong Kong to the mainland in March didn’t collapse, but Swiss export to Hong Kong did, two things could have happened. Or Hong Kong, which has net imported 924.6 tonnes of gold since 2010, shared a little of its yellow metal to supply the mainland, or other countries than Switzerland increased their export to Hong Kong. To find out I made a chart combining Hong Kong net import with Hong Kong’s main trading partners.

Hong Kong gold trade monthly, March 2014

From looking at the chart I think this is what happened; during Q1 Hong Kong net import dropped (Switzerland and UK imports down, Australia and the US quite stable in March), which means a bigger share of what they imported was sent forward to the mainland supplemented by inventory build up in Hong Kong over the past years.

From stats of the Shanghai Gold Exchange I know Chinese wholesale demand came down after Q1 without premiums going up. This suggest there hasn’t been a supply shortage in the mainland in April. However, even China’s non-government demand pace in April combined with demand from the PBOC, India, Russia and the rest of the world can transcend global mining and scrap supply, pressuring the floating supply. Let alone if Chinese demand will spring back, which is quite likely to happen at these prices and given the fact the Chinese government is officially stimulating its people to buy gold.

Additional charts: Hong Kong net import in Q1 accounted for 193 metric tonnes.

Hong Kong gold trade 3-2014

Chinese net import from Hong Kong in Q1 accounted for 287 metric tonnes.

Hong Kong - China gold trade 3-2014