by Craig Hemke, Sprott Money:
Two years ago, following a surge in the use of “Exchanges For Physical” by traders at the COMEX, Eric Sprott asked me to begin tracking and recording the daily totals for this practice as posted by the CME. It’s time for an update.
First, let’s attempt again to discern what the heck an “exchange for physical” really is, because the truth of the matter is, no one really knows. When we first wrote about EFPs back in April of 2018, this was the best summary explanation we could find:
So, these are “ex-pit transfers between two parties”. OK. If that’s the case, then EFPs are best categorized as a swapping of positions between two parties. Given the volume of these transfers each day, it’s safe to assume that the two parties in question here are almost always Bullion Banks. And what are “Bullion Banks”? These are the banks that manage the physical delivery market in London…and they operate hand-in-glove with their trading desk operations on the COMEX in New York.
(By the way, the conspiracy to rig and manipulate prices between London and New York trading is precisely what the U.S. Department of Justice is currently investigating under the RICO statutes…an investigation that has already yielded six indictments, including the former head of JP Morgan’s global precious metals desk, Michael Nowak. It’s noteworthy that up until his indictment, Nowak also proudly served on the board of directors of the LBMA. Read more here: https://www.zerohedge.com/markets/abject-corruption-exposing-financial-political-complex-protecting-its-own-gold-manipulation)
Anyway, back to the EFPs. Though this practice of “ex-pit transfer” has been around for decades, the use of this scheme has increased dramatically in the past several years, possibly coinciding with a similarly dramatic increase in total contract issuance and open interest.
How does the CME itself define an EFP? Here’s a link, an excerpt of which is pasted below: https://www.cmegroup.com/trading/metals/precious/g…
Note the last line above. “EFP is a key component in pricing OTC spot gold”. Dutch money manager Gijsbert Groenewegen offered to provide his expertise and insights to this process back in 2018, and back then, he suggested that the dramatic surge in EFP use was also a tool for Banks to directly impact price. Groenewegen theorized that The Banks do, in fact, now use EFPs as a means to control prices off-exchange and through the deliberately-opaque OTC markets. This is worth considering, and you can read his article here: https://www.tfmetalsreport.com/blog/8942/guest-pos…
But let’s get back to the sheer volume of EFPs at present, because in the end, I believe it helps to reveal again the utter scam, sham, and fraud of the current digital derivative and fractional reserve pricing scheme.
From the CME Group’s own website, it is explained that futures contracts and EFPs are utilized by “gold traders” who “frequently trade OTC with Banks to hedge gold transactions”. OK, that sounds legitimate. You’ve a big position and you’d like to hedge it? Go right ahead. In fact, the latest global hedge book update from the World Gold Council estimated the current demand for producer hedging to be about 266 metric tonnes: https://www.gold.org/goldhub/research/gold-demand-…
While 266 metric tonnes is a lot of gold, that only equates to about 85,000 COMEX contracts. Hmmm. There must be more to the story.
Well, maybe these ex-pit transfers are needed to help hedge the custodial gold stored in the Bank of England vaults in London? In 2017, Ronan Manly did some deciphering and concluded that there was only about 860 metric tonnes of this custodial gold held in the London vaults. That’s a lot of gold, too. Again, though, you could hedge every last ounce with about 277,000 contracts.
And what kind of total EFP volume are we talking about here? Again, I’ve kept track every single day since November 24, 2017, and the total amount of COMEX contracts—moved off exchange and “exchanged for physical”—is 4,444,344.
Yes, that’s right. In just two calendar years, 4,444,344 contracts have been swapped off of COMEX and, in the CME’s own words, converted into “physical, unallocated accounts”.
Now let’s do some math.
At 100 ounces per COMEX contract, 4,444,344 contracts equates to 444,434,400 ounces. And 444,434,400 ounces is about 13,820 metric tonnes. Now that, my friend, truly is A LOT of gold. For the sake of comparison, that’s more than the combined holdings of the Unites States, Germany, and Switzerland! It’s also about five times the total annual global mine supply!
So, we’re supposed to believe that “ex-pit transfers” executed by parties hoping to “hedge over- the-counter physical gold business” have totaled nearly 14,000 metric tonnes over just the past two years? And this is a legitimate component of the free, fair, and sacrosanct global pricing scheme for physical metal? Give me a break!