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Dave Kranzler: The Comex does not really trade gold, just derivatives
By Dave Kranzler
Investment Research Dynamics, Denver
Friday, April 3, 2020
Unequivocally, gold does not trade on the Comex. The Comex trades paper gold derivatives. It is a futures and options exchange on which a small amount of 100-ounce gold bars changes ownership each contract month.
The transfer of title is facilitated by the creation of an electronic record called a “warrant.” But even these “warrants,” which assign title to specific bars, are derivatives. Presumably gold is “delivered” to the parties who stand for delivery (the “stoppers”). But that “delivery” most commonly is the electronic transfer of a warrant from the entity short a paper gold contract to the entity who is long the same.
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Because the CME Group, operator of the Comex, and the U.S. Commodity Futures Trading Commission do not place a limit on the number of paper gold contracts -- 100 ounces per contract -– in relation to the amount of gold reported in Comex vaults, the price-discovery function has been largely removed.
As an example, as of Wednesday there were 489,955 open contracts representing 48.9 million ounces of gold, or 1,531 tons (roughly 50 percent of the gold annually produced globally). Lucky for the Comex, less than 1 percent of the open interest in any given month stands for delivery. ...
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