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Squeeze pushes gold higher

The world price of gold is dominated by trading of paper contracts in the London and New York markets. The trading of physical gold has minimal impact upon the spot price – thus far.


Most gold is traded in the form of paper contracts.

The New York COMEX gold market is a paper contract market primarily for people who want to invest in the price of gold without the bother of having to take physical custody of it. It is for this reason that the COMEX does not require 100 percent registered gold inventory to back its open contracts (unlike the Shanghai Gold Exchange where all purchasers there do receive physical gold).

On Sept. 25, the New York COMEX reported only 161,940 ounces of registered gold in its bonded warehouses. This compared to an open interest at the close that day of 425,662 contracts representing 42,566,200 ounces of gold. This maths out as only one ounce of physical gold to cover about 263 ounces of gold owed on the contracts. This is close to the lowest coverage of COMEX gold contracts by registered inventories in many years.

At the COMEX close on Sept. 25, the bonded warehouses also held 6.69 million ounces of eligible gold. So, what is the difference between registered and eligible COMEX gold inventories?

Registered gold inventory is allocated to cover deliveries of maturing COMEX gold contracts. Eligible gold inventory, in contrast, is not allocated to delivery against maturing COMEX gold contracts. However, they can be delivered against contracts should the owner of eligible gold elect to do so.

Altogether, the New York COMEX gold market is showing one major sign of a developing supply squeeze. However, prices are not yet trading in backwardation, which would be a sign of an existing supply shortage.

In normal paper contract trading, called contango, contract maturities in future months normally trade at higher prices to the current “spot month” price by roughly the interest rate over the intervening time period.

On Sept. 25, the London gold market was not in contango. Instead, it was in backwardation up to three months in the future. This is an indication of a physical supply squeeze where buyers will pay a higher price to receive prompt delivery of gold rather than wait for future delivery.

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That this backwardation goes three months into the future is a sign of a larger supply squeeze than would be the situation if only the spot month price was trading higher than all future periods.

With the COMEX showing a developing supply squeeze and the London market actually trading in backwardation, together they signify strong prospects for higher gold prices in the near future.

But, remember that a shortage in physical gold is not the dominant influence on the price of gold. The U.S. government has a strong incentive as the world’s largest debtor nation to intimidate investors against abandoning paper assets such as stocks, bonds and currencies (especially the U.S. dollar). If the world’s stock markets are in turmoil and declining, the U.S. government can use its trading partners and central bank allies to suppress gold (and silver) prices, thereby discouraging people from getting out of paper assets and into precious metals.

So, when you hear about shortages of physical gold and wonder why the price is not shooting up, now you know why.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at Other commentaries are available at Coin Week ( He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” ( His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at

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