The Midas Touch: Turning Paper Into Gold

How to take physical delivery of gold and turn short sellers into long buyers

James E. Sinclair, Jan 5/03

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Taking physical delivery of gold is an effective strategy for turning short sellers into long buyers and cleaning up the manipulative potent futures market. Why? Because nobody ever does it. Here’s how it is done.

In the late 1970s, my company, the Sinclair Group, was one of the key brokers for the Hunt Brothers in the silver and copper markets. I knew these two good men professionally. Although I did transfer the account in 1979 to another brokerage facility because the positions were tying up capital I needed for other operations at that time, I can assure you that these men were in full cooperation with best interests of the COMEX Exchange. Their large copper and silver positions were rolled forward (meaning they sold the maturing contracts while buying the same amount of contracts for forward delivery) at each first notice day (notification that delivery was pending). However, the Hunt family was so successful because of an important practice: they took regular and constant delivery of small silver positions at each delivery date. This built in a demand for the hard asset as opposed to just paper. There is a major lesson here for gold.

It is my belief that by taking modest, orderly, and regular delivery of paper gold, as converted into real gold, the community will challenge the paper short position which has had a field day with us up to the first close of cash gold above $305.

Regardless of the size, simply taking physical delivery of precious metals regularly and constantly impacts the mechanism and price of the metal. This provides unease and discomfort to the massive paper gold and paper silver short sellers. It is a perfectly legal strategy that is simply not commonly used. This simple action reminds the paper short sellers that the paper is based on an underlying real asset.

Buying futures, options and gold shares does nothing whatsoever for the real gold market, the cash bullion market. In order to be effective and make your purchases count, please consider purchasing of one COMEX 100-ounce contract or one CBOT mini-NY gold 1-kilo contract with the intention of taking physical delivery.

How to Take Physical Delivery of Gold Futures’ Contracts

The Commodities Exchange (COMEX), a division of the New York Mercantile Exchange (NYMEX), provides a forum for the trading of gold futures and options (as opposed to the “traditional” means of investing in gold, such as bullion, coins, and mining stocks). In addition to trading futures (“contracts with firm commitments to make or accept delivery of a specified quantity and quality of a commodity during a specific month in the future at a price agreed upon at the time the commitment is made”), investors can actually take possession or “delivery” of their gold futures contracts if they wish. It is rare that a trader ever takes possession of the physical commodity s/he trades, but not impossible. Presently, less than 1% of all gold futures contract trades result in delivery.

Taking delivery of gold is also referred to as “exchange of futures for, on in connection with, physicals” or EFP. Deliveries of gold bullion against futures contracts traded on COMEX are available to an investor during any business day within the month specified in the contract. The first day a seller can give delivery notice to the buyer is the next to the last business day of the month prior to a maturing delivery month. The last day a seller can give delivery notice is the second to the last business day of a maturing delivery month (the day after the last trading day). The last trading day is the third to the last business day of a maturing delivery month. So, if an investor buys a December 2002 gold contract, the first notice day would be November 27, 2002.

Any gold delivered against a futures contract must bear a serial number and identifying stamp of a refiner approved and listed by the Exchange. Delivery must be made from a depository located in the Borough of Manhattan, New York City, licensed by the Exchange (listed below).

It is also possible to trade “mini NY-gold” futures Chicago Board of Trade. The unit for trading mini-NY Gold is 33.2 fine troy ounces. Buying CBOT mini-NY Gold futures and taking the position to expiration will result in the delivery of a bank vault receipt. The banks approved as regular for the delivery of gold are the same as the COMEX therefore delivery procedures and costs will be based on the same guidelines.

The procedure to take delivery of gold futures contracts:

1. Establish a long position in gold by ordering a purchase via a broker or bank with a correspondent able to execute an order on the COMEX or CBOT.
   
   
2. Wait for the account to clear through a COMEX or CBOT clearinghouse.
   
   
3. Hold the contract to the delivery month.
   
   
4. The clearinghouse will settle accounts and allocate the percentage equal to their percentage holding of open interest. Typically it is allocated through the first in, first out method.
   
   
5. Pay for the gold position in full.
   
   
6. Receive the warehouse receipt from the clearinghouse.
   
   
7. Contact the depository.
   
   
8. For delivery, you can either pick up the gold yourself, depending on the quantity (though, if it is a large amount, this is not advised for insurance/security reasons) or have an armored car deliver it to your bank. i. According to Brinks (one of the armored transportation services recommended by the COMEX), the maximum charge for domestic gold delivery is .27¢ per ounce (with a minimum charge total of $135) plus a $20 security charge. The more gold shipped, the less the cost per ounce will be. ii. Other charges associated with delivery include the warehouse fee for taking the gold out of the warehouse (things such as labor costs, etc.) – typically this costs approximately $15 per bar. iii. The delivery services carry their own insurance (i.e. IBI Armored Car has $100 million insurance for all their transportation services) but you may choose to take out additional insurance.
   
   
9. Safety deposit boxes can be as large as 55” by 54” and cost approximately $2800 a year (quote from Bank One in Chicago).

Approximate costs involved in taking delivery of gold from the COMEX in the U.S.*

* The domestic shipping maximum quote of delivery is .27¢ delivery charges are estimates based on the Brink’s quote that the more gold shipped, the less the cost per ounce.
** Armored car costs = $ per ounce plus $20 for security
*** Warehouse costs = $15 per bar
**** Not including additional insurance
***** Assume gold costs $326

Approximate costs involved in taking delivery of mini- NY gold from the CBOT in the U.S.*

For international delivery, there are a few more steps. According to Brinks, the shipping company will need specific mailing and packing information for each shipment:

a. How much it weighs? (by kilos for international shipments)

b. How it is packaged? The gold bars must be packed correctly for shipping. Either the Depository or the shipper can do. Typically, the Depository delivers gold on a palette. It must then be transferred into pails (which fit 8 bars) or into tubs (which fit 160 bars) for international shipping. The shipper must be able to see and count all bars. Brinks will transfer the gold on the palette to their Brooklyn vault and then package it themselves.

The base rate for international shipping 100,000 ounces would be .12 ¼ ¢ per ounce (approximately $12,250, or .04% of the total cost – quoted by Brinks). This includes the charges for pick up, packing the bullion (by Brinks), the air freight rate flight, having the shipment met by a local branch representative, customs entry, and a $25 airport security. All other fees, such as duties and all other customs, are not included in price estimate. The shipment must be from a bank to a bank, they will not pick up at a residence. Brinks will deliver to England, France, Germany, Switzerland, India, Hong Kong, Australia, Russia, etc.

To ship one 100-ounce bar, Federal Express will ship precious metals. The cost to ship a 7 lb package (one 100-ounce bar of gold) from New York to Zurich would be $100. There are no duties or taxes to pay for delivery gold to Switzerland. The bottom line estimate for delivering one 100-ounce bar of gold from New York to Zurich will be around $100.

An important note: any gold that is signed out of a COMEX depository and shipped internationally must be assayed before it is brought back to the COMEX for resale, at a cost ($138 per bar – the cost descends as the volume increases).

COMEX Depositories:

Brink's, Inc. 580 Fifth Avenue, Suite 400 New York, New York 10036 USA phone: 212-912-8530

HSBC Bank USA 1 West 39th Street, SC 2 Level New York, New York 10018 USA phone: 212-525-6439

ScotiaMocatta Depository (Scotia-Mocatta is the global bullion banking division of the Bank of Nova Scotia formed in 1997 by the bank's acquisition of Mocatta Bullion from Standard Chartered Bank in London.) 26 Broadway New York, New York 10004 USA phone: 212-912-8530

Resources:

http://209.67.30.245/jsp/markets/gol_pre_agree.jsp
http://www.chdwk.com/gold.cfm
http://www.toerien.com/advice_column/securities/gold_futures.htm
Brink’s (http://www.brinksinc.com/)

© 2003 James E. Sinclair

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