by Craig Hemke, Sprott Money:
COMEX Exchanges For Physical
Very few people understand—or even know of—the opaque COMEX–>LBMA process known as “Exchange Futures For Physical”. Even the term is misleading, as there’s clearly nothing “physical” about it.
The first thing you need to understand is that this is NOT a new phenomenon. EFPs have been utilized within the derivative pricing scheme for years. In fact, one of the best articles/explanation for the process was written all the way back in 2009. You can read it here: http://www.24hgold.com/english/contributor.aspx?ar…
Below is a key excerpt:
Last week, Dutch money manager Gijsbert Groenewegen added some additional background and an update to the current situation. You can read his work here: https://www.tfmetalsreport.com/blog/8942/guest-pos…
While Gijsbert focused his attention upon the ongoing use of EFPs in COMEX silver, we thought it necessary to point out the ongoing surge in the use of EFPs in COMEX gold, too.
Again, the use of EFPs in COMEX gold is nothing new. On average, the COMEX transfers out obligations for more than 5,000 metric tonnes of “gold” every year through this process. What’s currently unusual is the surge in EFP volume that began in 2017.
At Eric Sprott’s urging, we began recording the daily volume of COMEX gold EFPs on November 24, 2017. Since that date, the CME website has reported a total of 1,058,907 COMEX gold contracts under this Exchange For Physical process. At 100 ounces per contract, this equates to a settlement of a whopping 3,294 METRIC TONNES of “gold”. This places the annual run rate since November 24 of last year at about 7,500 metric tonnes, physically “exchanged” and settled through this process.
While it’s possible some of this “exchanging” is being done through the COMEX operations in Hong Kong, that appears to be only a small part of any settlement process. Instead, the vast majority of these “settlements” must almost certainly be taking place through London. But here’s the deal: The LBMA vaults hold only a fraction of the gold that would be needed to facilitate these trades.
Using data provided by the LBMA themselves, BullionStar’s Ronan Manly wrote this excellent bit of analysis last year. You can read the entire report through this link but, for this discussion, the primary section of importance is shown below: https://www.bullionstar.com/blogs/ronan-manly/lbma…
Simply put, if you exclude from possible “delivery” the gold held for the Bank of England and the gold held for the various ETFs, then the absolute maximum total of unencumbered gold held in the LBMA vaults is just 858 metric tonnes.