Let’s say you were a country or a group of very wealthy individuals and Covid hits. You see governments around the world print money like crazy. It makes you think there might be some inflation to deal with and you want to protect yourself. Gold and silver are the logical choices. So, if you decide to accumulate a whole bunch of precious metals, how would you do it?
You couldn’t do everything at once or it could move prices or possibly raise alarm bells that would block you from obtaining the metal you want. So, you would probably slowly start taking ownership of as much metal as possible without driving up the price. About halfway through accumulation, you would probably want to start taking physical possession of that metal. This seems like a logical and strategic plan.
Well, that is EXACTLY what the data shows has happened over the last two years. The data also shows that the accumulation of silver may be complete and now it’s just about getting the metal out of the vault. Gold appears to be in the accumulation phase still, but it’s also a much bigger market. Let’s look at the data…
Gold: Recent Delivery Month
October gold saw very strong delivery for a contract that is neither major nor minor (10x bigger than minor but 1/10th the size of major). Total contracts delivered so far (22,450) is 20% larger than last October and still has about 800 contacts remaining in Open Interest.
One thing to notice is that deliveries as a % of max open interest exceeded 50%. This type of action is typically seen in minor months with major months never rising above 10%. Even last October came in below 40%.
Figure: 1 Recent like-month delivery volume
Another interesting data point is that total deliveries will likely exceed the amount of open interest seen before First Notice (orange bar vs blue bar below), which will be the first time that happened since last October.
The indication here is that a lot of contract holders were not rolling into the close as is typically seen. They stuck around and took delivery of metal.
Figure: 2 24-month delivery and first notice
In October, mid-month activity is the strongest seen in a major(ish) month in 2022 so far. It is higher than October last year and only short of last December.
Figure: 3 Cumulative Net New Contracts
From a dollar volume perspective, this October will be the second-largest October on record!
Figure: 4 Notional Deliveries
The bank house accounts (excluding BofA) have delivered 3200 contracts on Net. This is the largest amount since Feb 2022 before the Russian invasion of Ukraine.
Figure: 5 House Account Activity
As the recent stock report showed, the physical movement continues unabated. Since May 1st, Registered gold has fallen by 6.35M ounces. The drainage has been non-stop for months now. Every day, little by little, the metal is being removed from Comex.
For perspective, in May, the total Registered stood at 18M ounces. This means that at the current pace, all Registered gold will be gone in less than a year!
Figure: 6 Recent Monthly Stock Change
Gold: Next Delivery Month
Jumping ahead to November shows a strong increase in open interest as First Position approaches.
With seven days to go, open interest is slightly below September (which became a record month) and a bit below March (just after the invasion). It’s likely November will be another strong delivery month given the current trajectory.
Figure: 7 Open Interest Countdown
The delivery strength in minor months has really accelerated in recent months. September even set a record for the biggest minor month delivery! This does not look like a trend that is slowing down.
Figure: 8 Historical Deliveries
Furthermore, the gold market remains in healthy contango with the February contract a full $13.8 above the December contract. This is the largest contango in over a year.
Figure: 9 Futures Spreads
The spot market is also seeing a large contango after dealing with a few periods of backwardation.
Figure: 10 Spot vs Futures
Silver: Recent Delivery Month
While gold deliveries continue to show strength with records still being set (i.e., September), silver delivery volume has fallen off a cliff. Delivery volume is on pace to be the smallest since Feb 2020.
Figure: 11 Recent like-month delivery volume
Mid-month activity has flat-lined in recent days.
Figure: 12 Cumulative Net New Contracts
The bank house accounts have completely left the market. They have only delivered 6 total silver contracts (not even visible in the chart below). This is the lowest activity since June 2019.
Figure: 13 House Account Activity
This October is 1/5th the size of the last two Octobers and even falls well short of the October pre-Covid.
Figure: 14 Notional Deliveries
While delivery volume has completely disappeared, physical demand has never been higher. Since May 1st, 43M ounces have left Registered (metal available for delivery). There are 38M ounces left in Registered. At the current pace, all the silver will be gone within 5 months!
Figure: 15 Recent Monthly Stock Change
Silver: Next Delivery Month
Jumping to November shows another very weak month upcoming. Open interest is even lower than it was heading into the current month.
Figure: 16 Open Interest Countdown
All that being said, the spot market remains in backwardation. This means that the spot price of silver is above the futures price. This indicates an extremely strong demand for physical metal right now.
Figure: 17 Spot vs Futures
So, what gives? Why is silver delivery so weak while gold delivery remains strong? If I had to guess, I think it’s because whoever wanted to accumulate metal has already accumulated all the silver they could on the Comex. Now all they need to do is take possession. Again, a strategic person would not do this all at once. You would do it slowly, but consistently. That is exactly what is happening.
Delivery volume surged in 2020 and 2021 but has since fallen. Total silver delivery volume since Jan 2020 has been over 700M ounces of silver. Some of that has been going back and forth, but no question someone was accumulating metal. Now they have it, potentially all of it and they just need to get it out of the vault before the alarm bells go off. Especially if they are still in the midst of accumulating gold.
Is this speculation? Sure. But the data is quite compelling.
The Fed is very VERY close to breaking something major. When they do, they will reverse tightening which should send gold and silver prices soaring. At that point, there may be very little physical metal remaining. It would be wise to accumulate physical before that happens.
Figure: 18 Annual Deliveries
Data Source: https://www.cmegroup.com/
Data Updated: Nightly around 11 PM Eastern
Last Updated: Oct 19, 2022
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