What is the Comex Gold Market Signaling?

As reported last week, Comex January turned out to be extremely strong in both gold and silver for a minor month. Most of that strength materialized after First Position. February was looking modest in gold and weak in silver, but the gold market is now showing outlier trends.

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

The Comex results usually start with silver, but the gold data needs to be highlighted first.

Gold: Recent Delivery Month

February gold is a major month but has started slowly with only 12.5k contracts delivered in the first two days.

Figure: 1 Recent like-month delivery volume

That being said, the open interest remaining is 7.6k as shown by the purple bar below. More than 20k stood open at First Notice which is higher than August and October, slightly below April and June, and well below December’s 31.5k (green bars below).

Figure: 2 24-month delivery and first notice

Below is a chart that shows the number of contracts delivered as a % of starting open interest in the first two days as the contract starts. This shows major months. At this point, 60% have been delivered, up from 18.3% on the first day. After the slowest start since December 2020, deliveries picked up quite a bit on day 2.

Figure: 3 Delivery Volume After First Notice

Why was such a low volume of contracts delivered on the first day? Was it that delivery started on a Friday? A similar event happened in December. It seems to be taking longer than normal to complete deliveries early in the month.

Another data point to keep an eye on is the number of contracts opening during the month for immediate delivery. The chart below shows this activity stretching back 4 years. Things have changed significantly since the start of Covid. The last two months have seen solid back-to-back strength, with each having more than 4k opened mid-month.

Figure: 4 Net New Contracts

Looking at just the major months shows that the current negative red bar above (-526) is not very indicative of things to come. A spike down to star the month has almost always been followed by steadily climbing mid-month deliveries. This has held true for all months except Dec 2020.

Figure: 5 Net New Contracts

As discussed previously, the mid-month activity the last two months was driven almost entirely by BofA House account opening and standing for delivery. They started December by delivering 11k contracts and have spent the better part of 8 weeks rebuilding that position (which is why BofA ended December down only 7.7k).

The chart below shows the House account activity over the last 3 years, singling out BofA. Once again BofA is at again for February, taking 3,7k in the first two days. BofA has now made up for its net loss in December (7,724) with the combined activity of Jan and Feb (8,627).

Does this mean the mid-month activity is set to slow this month? Or will BofAs appetite for physical continue to grow? Why did BofA spend a year building a position, see it wiped out in a few trading days, and then spend 8 weeks rebuilding that position?

Figure: 6 House Account Activity

Getting back to total delivery volume shows the current February well below past Februarys over the last decade. Accounting for current open interest would add another $1.3B. This is well above every year except for last February. That February record will probably stand unless something really unprecedented were to occur mid-month.

Figure: 7 Notional Deliveries

Gold: Next Delivery Month

March gold is a minor delivery month. It has recently diverged in a significant way from all other minor months looking back to mid-2020. The red line below has started to move up in a big way, unlike anything seen since Jan 2021 (which spiked back down) and then May 2020 (light green line). Remember, it was June 2020 when gold and silver both took off. Gold made a new all-time high on that price run.

Perhaps open interest will come back down similar to Jan 2021. But what if it doesn’t? It could keep accelerating like May of 2020 and continue to put pressure on the physical market.

Figure: 8 Open Interest Countdown

Now the real question becomes: are Feb and March related? What if Feb delivery volume started slow because there is less supply in the physical market than there appears to be on the surface? What would be the immediate reaction to a hint of supply shortages? Most likely a big increase in open interest for the following month, even if it is a minor month.

To be clear, this is complete speculation, but it is also not unreasonable given the data. The chart below shows minor month delivery volume over the same time period. While the pressure dissipated early last year, it has been steadily building since then. Is something bubbling under the surface?

Figure: 9 Historical Deliveries

Cost to Roll

The cost to roll a contract for April (the next major month) is also starting to move up. It’s still within the range of “normal” but it’s at the top end of that range. It’s the highest it has been since the February contract of last year.

Figure: 10 Roll Cost

The most likely scenario is the remaining February open interest contracts will stand for delivery in the next few days, March open interest will flatten or even reverse, and the roll cost will stay steady or drop. That being said, it’s not a sure bet. If something bigger is brewing, these trends could continue.

The gold price was beaten down after an expectedly “hawkish” fed meeting last week. It has since returned above $1800 as of publishing. While this recent price action is driven by speculators with hot money, some investors may be waking up to the Fed’s reality: the current bubble is so big that even hawkish talk can prick it, much less actually being hawkish. If so, the outlying trends above will continue onwards in the days and weeks ahead as prudent investors seek out physical gold.

Silver: Recent Delivery Month

The charts below follow the same order as the gold charts above.

Silver is not showing the same odd activity as gold. February is a back-to-back minor month (similar to November). in the first two days, 614 contracts stood for delivery with only 220 remaining in open interest. If this holds, it would be the lowest month since November 2020.

Figure: 11 Recent like-month delivery volume

Going into the delivery period showed silver with 822 contracts open. This is slightly below 868 for November 2021 but above the 444 in Nov 2020. Feb 2021 was an outlier due to the attempted Reddit silver squeeze.

In many ways, that event one year ago showed how thin the physical market really is as everyone scrambled to take delivery in a minor month. Had the squeeze effort not been actively constrained by the WallStreetBets (WSB) leadership, the outcome might have been very different.

The LBMA even highlighted this on page 6 of their recent 2021 report: “fears emerged as to whether there was enough silver should demand continue at this pace… had demand in iShares continued at the frenetic rate of late-January/early February it would only have been a matter of weeks before London’s existing stock was used up”. That is an incredible admission!

Note: WSB leadership actively worked against the viral silver squeeze post to refocus attention on GME and AMC rather than silver, thus the “squeeze” only lasted a few days. Unfortunate, given the supply constraints noted by the LBMA themselves.

Figure: 12 24-month delivery and first notice

Nov 2021 saw a massive amount of net new contracts mid-month, but it was still the smallest minor month of 2021. Can this February see similar mid-month activity? The chart below would indicate a trend likely to continue. In fact, Jan silver was seeing activity through the last day of trading and was the largest net new contract month since Sept 2019. 954 contracts were opened mid-month to stand for delivery!

As the chart below shows, mid-month activity was much more normal in silver than it was for gold before Covid.

Figure: 13 24-month delivery and first notice

Looking at the House account chart below shows that BofA has not (yet?) made its presence felt in February. It did not recover all of its December losses in January, still down more than 2k. Does this mean more activity can be expected this month? Time will tell.

Figure: 14 House Account Activity

As shown below, February is typically a very small month in general. Over the last decade, only Feb 2021, which was the Reddit silver squeeze, showed any material delivery volume. If the current expected volume holds, this Feb would actually come in below Feb 2012.

Figure: 15 Notional Deliveries

Silver: Next Delivery Month

March brings the first major silver month of the year. Contracts are already starting to roll and the current trend is below average. That being said, a lot happens during a major month, so it is way too early to get any sense of how March will finish.

Figure: 16 Open Interest Countdown

As shown below, December bucked the trend and saw an uptick after a pretty consistent deceleration throughout the last 18 months (the lone exception being March last year). Can March 2022 gain some momentum?

Figure: 17 Historical Deliveries

Cost to Roll

The cost to roll a contract to the next major month is right in line with average, so nothing is flashing on this data point either.

Figure: 18 Roll Cost

Wrapping up

Gold is showing several outlier trends:

• Jan – exceptionally high mid-month volume for a minor month
• Feb – slow start to fill delivery requests
• Mar – recent surge in open interest
• Apr – cost to roll is just starting to creep higher

It’s very possible nothing comes of these trends, and the silver market is certainly not showing anything out of the ordinary. Still, this data must be watched closely in the days and weeks ahead. If the physical market starts to get stressed, this is the dataset where it will show up first.

It will be hard to replicate the massive delivery seen in 2020. As shown below, 2021 was still large by historical standards but below the massive volume in 2020. Still, the higher volume indicates more physical demand from investors. 2022 just started, so it will be interesting to see how the year unfolds. Stay tuned!

Figure: 19 Annual Deliveries

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

Data Updated: Nightly around 11 PM Eastern

Last Updated: Jan 31, 2022

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