Comex Delivery Update: Shorts are Dragging Their Feet Again

The following provides an in-depth analysis of the COMEX futures options market for gold and silver.

Gold: Recent Delivery Month

Gold started June delivery with 22,394 contracts outstanding. This is below April and December, but above August, October, and February. It is about on par with last June.

Delivery on the first day was surprisingly weak with only 4,085 contracts being delivered on the first day. This represents 18.3% of the total contracts which is well below normal (see figure 3 below).

Figure: 1 Recent like-month delivery volume

The dive into the close was fairly average for a major month. This can be seen as the difference between the blue and green bars below. As of now, there are 18k contracts still open.

Figure: 2 24-month delivery and first notice

The more interesting data point is the lack of deliveries on the first day. This is typically close to 50% of OI at First Notice, yet came in at 18.3% this month. Slow deliveries have been a theme this year. It’s up to the shorts when to deliver and they have all month to do so. It’s hard to know why the shorts have been dragging their feet of late, but it’s definitely something to keep an eye on.

Figure: 3 Delivery Volume After First Notice

Spreads stayed high into the close at about $6 between the June and August contract.

Figure: 4 Roll Cost

So far, the banks have come out as being net positive in delivery volume. This is another metric that aligns with February (the other being slow delivery on day 1). It was in late Jan/early Feb that the price started to break out. Could it be possible that this activity is a foreshadowing of another breakout during the month of June?

Figure: 5 House Account Activity

From a dollar perspective, June 2020 is still head and shoulders above the rest. It’s quite possible this month could challenge June 2021 though. This will primarily depend on mid-month activity.

Figure: 6 Notional Deliveries

One other thing to note. The stock report showed banks adding to Registered supply in the leadup to delivery. 245,000 ounces were moved into Registered in the final days. This is more than 10% of total expected delivery volume but is still the largest addition to Registered since April. If inventories are so flush, why the sudden movement of metal into Registered on the last day before delivery?

Figure: 7 Recent Monthly Stock Change

Gold: Next Delivery Month

July is showing open interest that is middle of the pack and well below the surges seen in both March and May (gray and brown lines).

Figure: 8 Open Interest Countdown

May open interest finished weak but then saw a very high volume of contracts opened mid-month for immediate delivery. 4,745 contracts were opened mid-month which was more than 3x larger than the contracts that stood open at First Notice. As shown in Figure 5, this was driven entirely by customer accounts as House accounts saw net outflow delivery volume last month. This resulted in significant delivery volume last month, continuing a trend established last May.

Figure: 9 Historical Deliveries

Finally, jumping into August shows high demand for the contract. Open interest is more than 100k contracts larger than August 2020 and 40k larger than August 2021. Open interest sits below only June 2022 and December 2020.

Figure: 10 Open Interest Countdown

Spreads

The spread between August and October is already wider than the June/August spread at the same time.

Figure: 11 Spreads

Silver: Recent Delivery Month

Silver delivery volume has started the month strong, already exceeding the total seen in April on the first day of trading.

Figure: 12 Recent like-month delivery volume

Silver had a surprisingly strong close into First Notice. After showing several months of weakness before First Notice, it closed at the highest since the January contract. Furthermore, unlike gold, 90% of the contracts were delivered on the first day alone.

Figure: 13 24-month delivery and first notice

The house accounts are net receivers of metal so far this month, with BofA showing its first activity since the March contract.

Figure: 14 House Account Activity

It’s unlikely this June will surpass the massive delivery volume seen last June, but it is already the second-largest June on record in terms of dollar volume.

Figure: 15 Notional Deliveries

Silver: Next Delivery Month

Despite the delivery strength, July is looking quite weak compared to recent history. This is driven by a general lack of interest in the silver market at large as pointed out in the recent technical analysis.

The CFTC report will be reviewed next weekend in detail. As a quick preview, Hedge Funds have gone net short silver for the first time since June 2019. This compares to being 45k contracts net long as recently as March.

Figure: 16 Open Interest Countdown

The major months were showing strength and then lost momentum in May. The current open interest volume suggests delivery could be low again in July. Watching mid-month deliveries for June could be an early indication.

Figure: 17 Historical Deliveries

Despite the weakening in open interest, silver spreads now sit at the highest point since December 2020. This means that investors anticipate higher prices in the near future.

Figure: 18 Roll Cost

Wrapping up

There is no question that enthusiasm for the metals has waned in recent weeks. After seeing a surge following the Russia/Ukraine conflict, the Fed’s hawkish talk has weighed on metals and markets at large. That being said, delivery volume is still elevated when compared to pre-Covid. The action seen in the physical stock reports suggests that inventories are much thinner than they appear.

There is no doubt that some investors are taking the slow and steady approach of accumulating physical metal. At halfway through the year, delivery volume is on pace to meet or exceed the volume seen in 2021. If and when the Fed pivots, it’s likely that delivery volume will challenge 2020 levels. The question then becomes, will there be enough supply to satisfy physical demand at current prices. The answer is likely “No”. For those who can see what lies ahead, it’s a good idea to load up on physical now, before the rest of the market wakes up to the Fed’s next move.

Figure: 19 Annual Deliveries

Data Source: https://www.cmegroup.com/

Data Updated: Nightly around 11 PM Eastern

Last Updated: May 27, 2022

Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/