Delivery volume in the July gold contract got off to the weakest start in years, but then had a major mid-month rally, turning it into one of the strongest minor months in recent history. Over the last 15 months, it only trailed the blow-out month of March. Momentum has continued in the August contract.
As the chart below shows, 16,834 contracts were delivered on the first day. This is almost the size of the entire month of October and February. August still has 15k contracts of open interest which will all most likely stand for delivery. This will make August the second strongest month since February 2021, trailing only December.
Figure: 1 Recent like-month delivery volume
The activity into First Notice was strong and gold entered the delivery period with the highest open interest in over a year (green bar). Given the activity of mid-month contracts (red bar), it’s very possible that gold exceeds last February and has the strongest delivery month since August 2020 when 49k contracts were delivered.
Figure: 2 24-month delivery and first notice
From a dollar perspective, this August will certainly exceed last August, possibly approaching $6B in delivery. Unless something incredible happens with net new contracts, this month will likely fall short of August 2020 when almost $10B in gold was delivered!
Figure: 3 Notional Deliveries
So far, the bank house accounts have been net recipients of the delivery volume. After BofA stepped in to deliver out almost 4,500 contracts in July, they bought back almost half so far in the first day, receiving delivery of 1,962 contracts. The other bank house accounts are also major receivers, taking delivery of 5,273 contracts.
Figure: 4 House Account Activity
It’s very possible the banks are trying to restock their inventories. There has been a major depletion of stock over the last few months. As the chart below shows, this has accelerated in recent weeks with physical metal flying out of Comex vaults. Since July 8th, more than 2.3M ounces have left the Comex system.
Figure: 5 Recent Monthly Stock Change
Gold: Next Delivery Month
September gold is also looking strong. Over the last 18 months, September is trailing only May 2022 at the same time as the contract. This was near the peak of Russia/Ukraine concern when gold was exploding higher.
Figure: 6 Open Interest Countdown
The war created a massive surge in delivery volume as shown by the blow-out month of March seen below. The strength in July can also be seen. Comparing the chart above to the chart below shows that the minor month delivery surges are primarily dependent on mid-month activity. Contracts roll into First Notice around 3k but then can deliver well more than that.
Figure: 7 Historical Deliveries
Silver: Recent Delivery Month
August silver is a minor month. Even so, silver has been unable to catch the same delivery volume as gold. With 102 contracts still open, August is on pace for the weakest month in years.
Figure: 8 Recent like-month delivery volume
That being said, mid-month activity will be the ultimate driver. Some months have seen over 1,000 contracts opened for immediate delivery.
Figure: 9 24-month delivery and first notice
Looking at dollar amounts, this August could be the smallest since 2018.
Figure: 10 Notional Deliveries
Looking at the bank house accounts, BofA has already restocked most of the silver it gave up last month (606 vs 548). Overall activity is generally muted though.
Figure: 11 House Account Activity
The one big caveat is the activity in the actual physical market. Silver may be lagging gold in delivery volume, but it is leading gold in terms of metal leaving Registered. Since May 1, over 25M ounces have left silver Registered. While much of that has been put into Eligible, that metal is no longer available for delivery. It’s very possible this is why delivery volume has fallen off… there isn’t enough physical metal to actually deliver!
Figure: 12 Recent Monthly Stock Change
Silver: Next Delivery Month
September silver is also looking weak, but it is way too early in the month to draw any conclusions.
Figure: 13 Open Interest Countdown
Aside from the surge around the Ukraine war, the momentum has clearly been down. Maybe September can be the month that finally sees a reversal!
Figure: 14 Historical Deliveries
Traders at least think prices will be higher in the months ahead, with silver showing the strongest contango since at least December 2020.
Figure: 15 Roll Cost
The Commitment of Traders report this afternoon will likely further confirm that speculative traders were net short headed into the Fed meeting this week. The smart money has taken the other side of that trade, demanding physical metal and then removing it from Comex Registered inventories. As traders drove prices lower, investors have gobbled up physical at bargain prices. These prices may never be seen again.
The Fed is talking a tough game, but the economy is falling down around them. Inflation remains elevated even while most economic indicators are pointing to a dramatic slowdown. The Fed is making its last stand on the job market. By claiming the job market is strong, the Fed is trumpeting the White House message and redefining the meaning of recession. This will cut both ways, however. When the layoffs inevitably show up in the jobs number, the Fed will once again look foolish with forecasts that were way off the mark.
Confidence in the Fed is eroding and could collapse. Smart money is positioning for this by getting physical gold and silver. It will be the best insurance policy for what lies ahead.
Figure: 16 Annual Deliveries
Data Source: https://www.cmegroup.com/
Data Updated: Nightly around 11PM Eastern
Last Updated: Jul 28, 2022
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