Gold: Recent Delivery Month
Gold started July delivery with 937 contract outstanding. This is the lowest level since November of last year and the second-lowest since the start of Covid (see figure 2).
As the chart below shows, about 82% of those contracts have been delivered in the first two days. At the current pace, this will be the weakest minor month delivery volume since at least 2019.
Figure: 1 Recent like-month delivery volume
The chart below shows the current weakness in contracts outstanding on First Notice (green bar). Other weak months have seen strong delivery volume in the form of net new contracts mid-month (red bar). July would need a pretty big surge to see similar delivery volume of recent minor months. On the first day, 84 contracts were opened mid-month for delivery.
Figure: 2 24-month delivery and first notice
So far, the bank house accounts have delivered out about half the metal. Bank of America is absent after a small showing last month and was quiet in the last minor month.
Figure: 3 House Account Activity
From a dollar perspective, this July is closer to pre-Covid levels. Even after the 253 current outstanding contracts are delivered, total dollar volume will be well below July 2021 when the price of gold was much lower.
Figure: 4 Notional Deliveries
Despite the lack of delivery interest, metal continues to leave the Comex vaults at a pretty fast pace. The chart below shows how the vaults have been losing about 100k ounces a day fairly consistently.
Figure: 5 Recent Monthly Stock Change
Gold: Next Delivery Month
August is showing open interest that is slightly above recent history. It’s only below April and June 2022 but comfortably above most of 2021 except for February.
Figure: 6 Open Interest Countdown
The chart below shows deliveries for the last several major months. Delivery volume in June was fairly strong, even beating out last June. Last June was followed by a strong August before October and February saw large dips with a strong December in the middle. Perhaps a similar trend will emerge this year.
Figure: 7 Historical Deliveries
The spread between the August and October sits at the highest level since at least February 2021. This is an indication that the market still expects higher prices in the months ahead despite a pretty strong sell-off in recent days.
Figure: 8 Spreads
Silver: Recent Delivery Month
July is a major month in silver and has started delivery with barely a pulse. If all the current contracts are delivered, this would be the weakest delivery volume since at least 2019.
Figure: 9 Recent like-month delivery volume
The day before First Position was also the lowest in over two years. Major months do not typically see strong mid-month activity (red bar) which means it’s unlikely silver will see a turnaround in the next few weeks. On the first day, 68 contracts have been cash settled rather than opened.
Figure: 10 24-month delivery and first notice
Unlike gold, the house accounts are net receivers of metal so far this month. BofA is again sitting on the sidelines.
Figure: 11 House Account Activity
Looking at dollar amounts, this July is likely to be the lowest since July 2017 despite higher prices.
Figure: 12 Notional Deliveries
One positive thing to note is that metal continues to leave Registered. As the stock report notes, this is metal available for delivery. Is it possible that delivery volumes have gotten so low because there is not much metal to actually deliver? It’s certainly possible, but the technical analysis shows that interest in silver has clearly waned. The Commitment of Traders report today will likely confirm this further.
Figure: 13 Recent Monthly Stock Change
Silver: Next Delivery Month
August silver is a minor month and is currently trending in the middle of the pack.
Figure: 14 Open Interest Countdown
Last month did finish stronger than April but was still well below recent highs.
Figure: 15 Historical Deliveries
While physical metal continues to leave Comex vaults, delivery volume has clearly decreased. This could be a signal that sentiment is bottoming in the metals. Hawkish talk at the Fed continues to be very elevated but now the Fed has to back up that talk or risk losing credibility. Unfortunately for the Fed, in the first month of QT, they completely failed to follow through, reducing the balance sheet by only 1.5% of the promised amount. At this point, how long until the Fed does lose credibility?
The markets still expect the Fed to deliver, but more and more indicators are flashing recession which will make it harder for the Fed to follow through. It’s highly likely the economy is already in recession considering another revision lower to -1.6% for GDP in Q1 and a GDPNow Forecast of -1% for Q2.
The Fed will have to officially pivot to save the economy but will sacrifice the Dollar in the meantime. Is the failure to shrink the balance sheet the first step in their pivot as they chicken out of their inflation fight? All the hawkish talk will not translate to action because the economy simply cannot handle it. Interest will come rushing back into precious metals once this becomes obvious to the rest of the market.
The federal debt is too high to withstand higher rates, and too much debt is being issued for the private market to absorb. Foreign holders are also reducing treasury exposure at the fastest pace on record only exacerbating the problem. If the Fed ever does get around to shrinking the balance sheet some, it will not last long. When it publicly relaunches QE, there will be a great repricing across many asset classes, precious metals included.
Figure: 16 Annual Deliveries
Data Source: https://www.cmegroup.com/
Data Updated: Nightly around 11 PM Eastern
Last Updated: Jun 30, 2022
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