Dwindling U.S. gold stocks signal surge in physical demand

Mon Apr 29, 2013 11:22pm EDT

* COMEX stocks down 30 pct since Feb, accelerated last week

* Growing preference for physical bars, coins after selloff

* Higher premium in non-U.S. markets triggers bullion outflow

By Frank Tang

NEW YORK, April 29 (Reuters) - Physical gold stocks held at CME Group's Comex warehouses in New York have dropped to a near-five year low in a further sign that gold's price crash unleashed a frenzy of demand as investors scramble to buy bars and coins.

U.S. gold stocks, comprised of 100-troy ounce COMEX gold bars, have fallen almost 30 percent since February, as dealers have switched to selling into the burgeoning Asian market, where prices and demand are higher than in New York.

But the pace of the outflows from vaults has accelerated since bullion's historic sell-off, falling more than 7 percent last week for its biggest weekly drop since 2005.

Analysts say the sudden recent surge is further evidence of pent-up demand for coins and bar, particularly from China and India, caused by the slump in prices. Investors also appear to prefer to hold physical metal rather than futures, traders said.

"Some investors feel much safer having gold within their reach and their hands," said Jonathan Potts, managing director of Delaware Depository, a CME-approved silver warehouse which also holds gold and other precious metals for investors.

Total gold stocks held at CME's COMEX warehouses, often viewed as a gauge for physical supply and demand, fell almost 30 percent to around 8 million ounces on Friday, their lowest level since July 2008, from this year's high of nearly 11 million ounces in mid-February, CME data showed.

What surprised many dealers was that most of last week's withdrawals, worth $620 million based on Monday's prices, were from a vault run by JPMorgan Chase, one of the top global bullion banks.

A JPMorgan spokeswoman declined to comment.

Exchange data showed that the fall at JPMorgan's warehouse was led by plummeting "eligible" stocks, which meet COMEX requirements but do not have warehouse delivery receipts issued against them, as opposed to "registered" stocks, which are the only gold used to meet Comex futures delivery requests.

The bank's eligible stocks fell more than 420,000 ounces to 163,802 ounces on Friday from 586,769 ounces last Monday, making up about two-thirds of all Comex gold stocks.

On the other hand, JPMorgan is by far the biggest warehouse holding about 760,000 ounces of registered stocks.

Eligible gold stocks held by HSBC, another top bullion bank, however, edged up 40,000 ounces to 3,146,000 ounces on Friday from 3,184,000 ounces, although they are still below the 3,343,000 ounces prior to gold's sharp selloff two weeks ago.

An HSBC spokeswoman also declined to comment.

In addition to JPMorgan and HSBC, CME has three approved gold warehouse firms, Brink's, Scotia Mocatta and Manfra, Tordella & Brookes (MTB) for a total of five CME-approved storage facilities all based in New York City.

While the JPMorgan warehouse accounts for 11 percent of total gold stocks, HSBC and Scotia Mocatta hold a combined 80 percent of them.

The strength of physical retail buying has taken dealers and mints around the world by surprise, leaving them struggling to keep up with demand.

Potts said that Delaware Depository, based in Wilmington, Delaware, has so far this year delivered about $500 million worth of physical precious metals, or about 340,000 ounces of gold, a jump of 10 percent from the same period last year.

Investors' voracious physical appetite has helped bullion recover more than half the ground lost in the historic two-day sell-off. Spot gold prices hit a ten-day high of $1,485 per ounce on Friday and it traded up nearly 1 percent at $1,475 on Monday.

Even so, speculative investors show no sign of returning, uncertain about bullion's prospects, as better economic data prompted some U.S. Federal Reserve policymakers to suggest withdrawing economic stimulus that has supported prices over the past four years.

ASIAN WEALTH, HIGHER PREMIUMS ELSEWHERE

Comex stocks had fallen since February on buying by affluent Asian investors.

U.S. export data for December showed an exodus of privately owned gold from the United States into emerging economic powers, such as China, which analysts attributed to a growing number of gold vaults and new precious metals investment products, particularly exchange-traded funds.

Pressure on Comex futures in recent months, as speculative investors have grown more bearish, have also spurred some U.S. banks and traders to sell bullion in Asia, where demand is better. U.S. COMEX futures had fallen 21 percent to $1,320 an ounce on April 16 from the 2011 year-end prices.

Implied gold lease rates, seen as bullion's premium calculated by subtracting the London interbank offered rates (LIBOR) from the gold forward offered rates (GOFO), had turned positive since February.

GOFO are the rates at which bullion banks are prepared to lend gold on a swap against U.S. dollars.

Since gold's cost of carry is negative in the United States, analysts say, it is profitable for dealers to take up Comex stock, remelt the bars into the correct specification and sell it to markets in Asia or Europe where physical gold demand exceeds that in the United States.