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Why Are Paper Claims on Physical Gold Rising?

The Rising Dollar and Precious Metals in Early November 2015

(Continued from Prior Part)

Precious metals tumble

The past week has been adversely affecting precious metals after the Fed’s unexpected hawkish stance. Gold fell 3.6% on a five-day trailing basis and touched a low of $1,105.60 per ounce. Wednesday, November 4, 2015, was the fifth straight day of declines for gold. It settled at $1,106.20 per ounce while silver dropped 1.2% and closed at $15.06 per ounce on the same day.

The outlook seems unfavorable for precious metal investors as the Fed looks at an imminent rate hike in December. Rising interest rates would cause gold to lose its luster since it doesn’t bear interest like Treasuries.

The total registered gold at COMEX fell to a new low following another transfer of registered gold into eligible gold. The eligible class primarily refers to gold stored in the COMEX warehouse that conforms to exchange standards. However, it’s unavailable for contract delivery. Like eligible gold, registered gold meets exchange standards but is also available for delivery to gold paper bearers.

Paper claims per ounce of gold

Today, the gold coverage ratio, which measures the amount of paper claims for every ounce of physical gold, hit a new all-time high of 293 ounces of paper per ounce of registered physical gold. The rise in the number of paper claims per physical ounce of gold had been rising for two months. This increase accompanied a reduction of JPMorgan’s (JPM) registered inventory by almost 12,000 ounces of gold. For the current new all-time high figures of paper claims, JPM’s registered inventory is now down to just 10,777 ounces of gold. Also, many other vaults continue to see either outright withdrawals or comparable adjustments.

Tracking the miners and ETFs

As the past week remained unfavourable for precious metals, ETFs like Direxion Daily Gold Miners ETF (NUGT) and Sprott Gold Miners ETF (SGDM) fell 18.8% and 8.0%, respectively, on a five-day trailing basis. The mining companies that are among the worst performers on a five-day trailing basis include Primero Mining (PPP), Yamama Gold (AUY), and Royal Gold (RGLD). These three companies make up 9.2% of the Market Vectors Gold Miners ETF (GDX).

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