Guest Post: “Explaining Exchanges For Physical (EFPs), by Gijsbert Groenewegen


by Turd Ferguson, TF Metals Report:

Gijsbert Groenewegen of Silver Arrow Partners has taken the time to write this lenghthy explanation of the shady Comex “Exchange For Physical” process. You should definitely take the time to read it.
Gilbert focuses almost exclusively upon EFPs for Comex silver…as well he should as the numbers are extraordinary. However, this opaque process is not confined to just silver.

At Eric Sprott’s urging, we’ve been keeping track of the daily totals of EFPs in Comex gold since November 24 of last year. In the 4.5 months since, the CME/Comex have transferred an incredible 1,022,095 contracts off of the exchange and “delivered” them through this process, most likely using unallocated gold in London.

At 100 ounces per contract, this equates to 102,209,500 ounces of “gold” or a whopping 3,179 METRIC TONNES. That’s more than the entire world will produce via mine supply this year!

This isn’t a new phenomenon as recent years have shown total EFPs between 5,000-6,000 metric tonnes. However, at this current pace, the CME/Comex is on a run rate of more than 8,000 metric tonnes. And from where do they find this “gold”. It’s clearly in the unallocated and hypothecated form as Ronan Manly at BullionStar reported last year that the LBMA vaults could not possibly hold more than 858 metric tonnes of unencumbered gold.

So, with all of this in mind, please take time to read Gijsbert’s excellent work. Hopefully, this will serve to increase your understanding of the hyper-leveraged precious metals markets in 2018.


Guest Post: “Explaining Exchanges For Physical (EFPs)

by Gijsbert Groenewegen

EFPs (Exchange Futures for Physical) are an escape route to allow the Comex to SET the prices for gold and silver using naked or non-backed futures and not declare default!

According to CME reporting some 10,464 silver Comex contracts (each contract representing 5,000 oz. of silver) equal to 52,32 million oz., over the last 5 trading days ending April 6, were Exchanged for LBMA London physically deliverable contracts through the so-called EFP route (Exchange Futures for Physical). This means that in April alone on average some 2,093 silver contracts or 10,46 million oz. silver daily were swapped to the London LBMA through the EFP swaps because these futures holders were standing, asking for delivery.

And as we know the Comex doesn’t have sufficient registered inventories, the inventories specifically allocated on the Comex for delivery on futures contracts. The reason the Comex doesn’t support full delivery is that the authorities (Fed, BIS, other central banks and the bullion banks, such as JP Morgan) use this model so that they can easily set the paper gold and silver prices at levels where they want to have it without having to back the contracts up with physical gold and silver (they don’t have).

The so-called fractional or partly backing has one ounce of registered physical gold and silver for every say 100 to 500 ounces equivalent paper issued futures contracts. Every gold and silver paper futures contract on the Comex represents 100 ounces of gold and 5,000 oz. of silver. The reason I use the word paper contract is because the contracts represent paper or nominal (US dollar) settlement and not physical (gold or silver) settlement.

With the facilitation of the fractional backing the authorities can therefore very effortless issue numerous paper futures contracts (or so called naked futures because they are naked, they are be backed up by the equivalent physical gold and silver ounces) in order to stem the inflow of money that would otherwise drive up the gold and silver prices.

The technique they use can be compared to companies that issue shares in order to prevent their share price to rise when potential investors want to buy shares in the company and thus increase the flow of funds into a company. Basically one can look at it as the difference between keeping the number of shares the same and see the share price rise a lot following the inflow of funds or increasing the number of total outstanding shares when new money of investors is coming in thereby diluting or mitigating the share price rise. In the latter example the inflow of funds is divided not by a fixed amount of shares but by an increasing number of shares. The same happens at the Comex whereby the bullion banks issue new futures contracts when investors want to take a future on the gold or silver price development thereby slowing down the price rise in the precious metals till the buyers are exhausted.

This is a pure paper game though that is changing now because the futures investors now want physical delivery through the EFP route n’importe quai thereby circumventing the nominal settlement in US dollars and strongly reducing the efficacy of the paper game. Effectively making the paper game redundant.

EFPs were created for an emergency situation but they seem to become the rule

Traders on the NYMEX have employed EFPs for emergency situations in the past, although it should be stated that the NYMEX doesn’t allow EFPs anymore. For example in 1982 demands were made by longs for delivery of heating oil during the first three delivery days on the February 1982 heating oil contract. An oil company with a sizable short position did not have the heating oil available to meet those demands for delivery some of which were offset by EFPs with the encouragement of NYMEX staff (Apex Oil Company v. Joseph DiMauro No. 86-7898).

Exchange Futures for Physical (“EFP”) transactions originated over a century ago in US markets for grains and grain futures. As mentioned here above EFPs were originally created as a temporary solution so that a naked short (not having the physical) could deliver in an emergency situation.

Though the exception has become the rule in the gold and silver markets and these EFP “emergency measures” are now being used on a daily basis and in huge amounts! And when one reads the Exchange Rule 538 that regulates these EFPs it basically summarizes the many escape clauses to the original futures contract in my point of view.

And we know when exceptions become the rule something has failed. Hence why one could argue that the Comex has materially defaulted on its ability to deliver the physical gold and silver, though for reasons as set out here above.

Putting world mine production and daily mine supply and demand in perspective

And because the Comex (THE global price setting mechanism for gold and silver) doesn’t have any inventories to deliver the physical gold and silver from the futures (multi-party or Exchange) contracts are swapped or Exchanged for bilateral or two-party contracts on the London LBMA market. The London LBMA OTC (over-the-counter) precious metal market consist of approx. 150 players, that are active in the precious metal markets, such as bullion banks, smelters, mines, transporters etc., that have agreed to adhere to and “play” by the regulations or rules set by the LBMA, London Bullion Market Association. As the LBMA says it is an association of persons/corporates and not a central standardized contract exchange like the Comex.

The futures holders that stand for delivery are issued a “deliverable” forward contract in London, with a fiat bonus, which is determined by the waiting time for their delivery. It should be emphasized that there is a huge difference having to deliver 1000 oz. of gold or 33.3 tons or 1,070,595 oz. The latter won’t be easily to source and therefore will take much much longer to get hold of.

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