Comment by mikhailfranco | Hacker News Reader

Comment by mikhailfranco | Hacker News Reader

Parent Full thread

COMEX is usually just a paper market, with almost all positions closed out before settlement.

London has paper transactions, but is also a delivery market, where large quantities of real gold change hands. The gold may not actually leave the vaulting system: the transfer can often be accomplished with a warehouse receipt.

However, since November last year, clients of the COMEX (often acting through JPMorgan bullion bank) have been standing for delivery, e.g. 62 tonnes in the 2 weeks after Thanksgiving 2024:

https://www.goldmoney.com/research/massive-comex-deliveries-...

Now JPMorgan is standing for delivery of 93 tonnes in February 2025 (3m troy oz, $4bn):

https://finance.yahoo.com/news/jpmorgan-plans-4-billion-gold...

COMEX has had to scramble to find the physical gold to deliver. The US price went up, creating a spread with London and an arbitrage opportunity. Physical deliveries from the LBMA vaults in London were flown to the COMEX vaulting system in and around New York.

If the deliveries cannot be made in New York, there is a rather murky process called Exchange For Physical (EFP), where the client is given a paper promise for gold delivery in London. Not sure if there is client discretion, or if they can be forced to accept EFP by the COMEX T&Cs.

I think that COMEX does have the right to cash settle delivery requests, but that would be seen as a soft default, and seriously damage its reputation as a physical market grounded in delivery.

First you have to fly the gold to Switzerland to a refiner and melt the London 400oz bars into COMEX 100oz bars.

New bars get new stamps, serial numbers, etc. It’s a spot where illegal gold can (doesn’t have to) be introduced.

Once you melted London 400oz bars into COMEX 100oz bars, then you fly them to New York.

This process in itself can inflate the COMEX price by the cost of delivery which is folded back into the forward price. When dealing with futures contracts it is important to know that the price is almost always localized based on the cost of delivery. There isn’t one unique global price of gold.

I believe COMEX changed their delivery standards 5 years ago to include LBMA 400oz bars, using a mechanism called 'ACE':

https://www.cmegroup.com/trading/metals/precious/faq-gold-en...

Every wriggle of the weasel needs a good 3-letter acronym. Perhaps they knew what might happen :)

Thanks for pointing it out :) Pretty interesting. I guess the trip is now a bit shorter!

When I see comments like this I'm wondering why everyone including economists and Marxists is under the delusion that gold is this universal commodity whose physical properties make it money, when in reality the entire point of money is to minimize transaction costs, not create them!

The total of COMEX deliveries in the last 2 months is almost 500 tonnes:

https://www.bullionstar.com/blogs/bullionstar/gold-silver-sh...

It seems the deliveries for Feb are now approaching 200 tonnes:

https://x.com/TFMetals/status/1889708073930919967

P.S. Gold is just under $100k/kg (~= 1 BTC :) So 1 tonne is ~$100m.

https://www.apmex.com/gold-price/1-kg-gold-price

P.P.S. The original JPM delivery of $4bn mentioned above is ~40 tonnes share of the 93 tonnes (3m troy oz).

Silly question, but how is the delivery of gold COMEX's problem?

I was under the impression futures (and derivatives in general) represent an obligation of whomever sold the future contract. Why is the exchange responsible for delivering all of a sudden?

The role of the exchange is to facilitate orderly markets by reducing counterparty risk. My knowledge is more stock market than commodities but normally they require collateral from the brokers so that they can recover from the broker, but ultimately they would be on the hook if they failed at their risk management. In reality though we know the government would not let a major exchange fail so there's also that unwritten rule.

So the COMEX is selling metals which they do not possess now? I thought the whole point is that COMEX coupons were backed by physical goods which you could actually cash out if you wanted?

Otherwise you are just betting on paper.

The gold to paper ratio in Comex is 300 to 1. The truth is accepting delivery is expensive. You cannot get a small amount of gold on comex. You’ll need a vault to put it in, insurance, armored truck service, etc. Most people buy gold futures as a hedge or speculation, and don’t want to actually go through the cost of accepting delivery.

The concern has always been a run on Comex if physical demand suddenly increases. In some ways that would be good, as the paper market is artificially keeping the price of gold down. If you don’t settle in gold you sell more contracts, and the supply is artificially inflated. In short term it will be awful for Comex, which does a very large amount of commodity futures.

> The gold to paper ratio in Comex is 300 to 1.

I think this says there is 300x as much physical gold as there is gold on paper. Context and common sense indicate the opposite was intended.

> COMEX is selling metals which they do not possess now?

You put $100 in a zero-balance account. You spend $10, deposit $20 and then spend another $30. Your ending balance is $80. The total value of transactions is $160. There is a 2:1 ratio of transactions to ending balance.

For technical reasons, when a commodities trader wants to exit or liquidate a position they typically do so by offsetting it. "To offset a position, a trader must take out an opposite and equal transaction to neutralize the trade. For example, a trader who is short two WTI Crude Oil contracts expiring in September will need to buy two WTI Crude Oil contracts expiring on the same date" [1].

If instead of a bank account the first example were gold contracts, the market would show $160 of gross contracts written netting out, in the end, to $80.

[1] https://www.cmegroup.com/education/courses/introduction-to-f...

They (bullion banks) assume everyone will close out contracts on COMEX.

Yes, paper promise. Sometimes promises can be kept, but not always.

Reply on news.ycombinator.com