Comex Results February Becomes the Month of Adjustments

There have been some major adjustments to headline data numbers so far in February from the BLS, the Fed, and now the Comex.

This analysis focuses on gold and silver delivery volume on the Comex. See the article What is the Comex for more detail.

First, the jobs report had its first round of Covid seasonal adjustments, which resulted in hundreds of thousands of jobs being reshuffled to more recent months. This helps show strength in a weak labor market. Then, the crashing money supply was seasonally adjusted upwards by +$450B. This helps signal to the markets that money is still accommodative.

The biggest adjustment was saved for last.

As reported yesterday, silver was on pace for a record delivery month with 22,749 contracts outstanding with one day to go, even exceeding the 22,560 in July 2020 at the same point in time. Remember, it was July 2020, right after record deliveries hit, that silver went ballistic.

However, the originally published number was a preliminary figure that was adjusted down to 15,996 late Friday morning. For those who don’t watch this data closely, there are two things to note. First, the preliminary data is usually published on the same trading day around 10-11 pm eastern. In the final days leading up to the March contract, preliminary data had been delayed well past midnight.

Preliminary numbers are then made final around 10-11 am on the following business day.

The second thing to note is that the difference between preliminary and final numbers is generally minimal. Some days they can reach as high as 1,000 contracts, but there was only one other day (Jan 24, 2022) where adjustments exceeded 1,000 contracts across all open months. On Jan 24, adjustments were split between the March and May contract, totaling approximately 1,600 and 1,000 respectively.

I have not been saving the preliminary information as long as the other data. I started collecting it around May last year after the Reddit silver squeeze. In either case, the chart below puts the latest adjustment into perspective. The chart shows adjustments across all contracts, summing together the March and May adjustments.

Figure: 1 Silver Preliminary vs Final

The adjustment for 2/23 was a very high 1,133, but this was demolished by the 2/24 substantial adjustment of 8,103. Gold also saw a large adjustment, but it was not significantly above average (note – gold is generally subject to larger revisions than silver). On average, silver adjustments are -160 contracts, which makes yesterday’s adjustment 50x larger than normal. For you statisticians out there, this was 12 standard deviations above average!

Now, we could jump to conclusions and assume there was collusion to bring the contracts down. After all, there was only enough registered silver to cover 16,113 contracts standing for delivery. Without yesterday’s adjustment, open interest would have closed at 15,325. Maybe that was a little too close for comfort, and some contract holders were asked to settle.

As much as I enjoy a good conspiracy, in this case, I am going to give the benefit of doubt to a more plausible explanation. Thursday was one of the most volatile days in recent memory, right after war broke out. Its possible data was delayed coming in, the report was published late with the best available information, and then final numbers reflected any missing data that came in late. In this case, the missing data was substantial.

Do I totally believe that? Certainly not, but I am calling it the default scenario (for now).

Gold regularly sees revisions of more than 5,000 contracts. From that perspective, the adjustment in silver would be more reasonable. But silver is not gold, so regardless of the reason, let’s count this as another flashing warning sign on the Comex over the last several months. With all that being said, let’s get into the data. Still some fireworks to view, even without broken records.

Silver: Recent Delivery Month

Silver had total open interest of 8,572 on First Position. If all of these stand for delivery, March 2022 will be the second-largest since last March.

With the number of contracts opening for immediate delivery mid-month, it could even exceed the recent high seen in December. Only 996 contracts have been delivered so far, but 7,576 are still open. Another slow start to the month (warning sign)!

Figure: 2 Recent like-month delivery volume

Below shows the lead up to First Position and the drop into the close. Without the adjustment mentioned above, the blue bar would have been a record. This reminds me of what occurred last July where the fall-off in contracts into close, was very substantial.

Below is a look at the major months, as shown, the net new contracts are fairly limited in terms of impact, so it is unlikely March will exceed December, but it could come close!

Figure: 3 24-month delivery and first notice

The total net new contracts can be seen below for all months below. February was a post-pandemic record, with 1,202 contracts opening for immediate delivery. What will March bring?

Figure: 4 Net New Contracts

Looking at the House account chart below shows that BofA is still in the market taking delivery of contracts after the blow-up in December.

Figure: 5 House Account Activity

In terms of notional delivery for March, this month will certainly be the second-largest March on record. The $1.5B delivered last year will be hard to beat! Still, the current pace should bring the total over $1B for this March.

Figure: 6 Notional Deliveries

Spread costs

The spread cost between March and May has dipped in recent days. This indicates that people are putting less value on time duration and actually starting to prioritize near-month contracts. It should be noted that the dip happened right when the first large adjustment happened for 2/23 (as noted above).

Figure: 7 Roll Cost

Silver: Next Delivery Month

April silver is a minor month and is only just now beginning to climb. The climb looks orderly and non-noteworthy. It will be interesting to see if this changes in the week ahead.

Figure: 8 Open Interest Countdown

Below shows the recent minor delivery months. You can see the impact that net new contracts had in February with 232% of peak open interest being delivered. This means that the actual delivery was 2.3x higher than open interest ever got throughout the life of the Feb contract

Figure: 9 Historical Deliveries

Gold: Recent Delivery Month

March gold has been an area of focus in recent weeks. Typically a non-event minor month turned into something to watch as open interest climbed into the close. With 1,740 contracts still open and 3,024 having been delivered, March should come in just under the strong January number.

Figure: 10 Recent like-month delivery volume

The chart below shows what an outlier March was compared to previous minor months. The green bar (OI at First Position) was the largest in recent history.

Figure: 11 24-month delivery and first notice

As seen above, net new contracts have been a major driver in recent months. February suspiciously bucked the trend with a large number of contracts cash settling instead of taking delivery. The net new contracts for March could drive delivery much higher. Last March saw 6,751 contracts opened for immediate delivery in the wake of the Reddit silver squeeze. Does this March have similar potential?

Figure: 12 Net New Contracts

For the third month in a row, BofA is back at the table taking delivery of a large number of contracts. They are outpacing all the other house accounts combined after the big wash-out in December.

Figure: 13 House Account Activity

Getting back to total notional delivery volume shows that the current March is below last year but still well above March historically. With the remaining open interest, delivery should come in just below $1B. However, that is highly dependent on mid-month activity.

Figure: 14 Notional Deliveries

Gold: Next Delivery Month

April gold is a major delivery month. It is currently well above trend but has pulled back in recent days as gold saw the sell-off on Thursday and Friday. The Thursday open interest did see an adjustment down by 7,500 contracts, but this doesn’t register nearly as much on the 450k of current open interest.

Figure: 15 Open Interest Countdown

December saw a healthy delivery volume, mostly at the expense of BofA as shown above. February was a dip, but also had almost 1.7k contracts cash settle. This would have brought deliveries over 20k.

Figure: 16 Historical Deliveries

Cost to Roll

Finally, a look at roll costs shows nothing abnormal about the current situation. Slightly elevated, but certainly within the window of normal.

Figure: 17 Roll Cost

Wrapping up

The Comex has been flashing signals with multiple outlier trends. March gold should prove fairly strong for a minor month. March silver could have been a massive month before the record adjustments were made to preliminary data. April gold is elevated, but trending back down. Spread costs are within a normal range. Thus, while many of the signals are coming back in line, the massive adjustment to preliminary data should not be ignored.

Gold is currently struggling with resistance around $1910. This is not surprising given it was massive overhead resistance for a decade. It would be healthy for gold to consolidate between $1850-$1900 similar to the consolidation between $1750-$1800. This would help strengthen the support at $1850, which is still somewhat fragile. Given the length of time at the last consolidation, hopefully, this one will take less time.

With the Fed walking a very tight rope in the months ahead, it is unlikely to be range-bound for too long. A break to the upside will be very bullish. While $1915 is very strong technical resistance, once it fully breaks through it could be off to the races (it’s certainly been trying to in recent weeks). A brief pause at $2000 could occur, but this is more psychological resistance than technical. If $1850 fails to hold, then it could very easily test $1750 again to test solid technical support.

Perhaps the Comex data could continue to give some early warning signs as it did for this recent price move. No question the large adjustments happening across multiple data sources is already raising eyebrows.

Figure: 18 Annual Deliveries

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

Data Updated: Nightly around 11PM Eastern

Last Updated: Feb 25, 2022

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