Silver off-month rises
This article first appeared on SchiffGold.
This analysis focuses on gold and silver data provided by the Comex/CME Group. See the article What is the Comex for more detail.
First Position Day is when contracts must post 100% margin to stand for delivery. Once delivery begins, contracts can settle in cash or more contracts can be opened and stand for immediate delivery (usually a sign of strong physical demand). Figure 1 below shows the last 24 months of silver delivery data when compared to First Position and the day before First Position. As can be seen, Open Interest falls significantly between the two days. This can be seen more clearly in Figure 4 below, the Open Interest countdown chart.
Silver is wrapping up a major delivery month that was on pace to potentially break records. However, something strange occurred in the final day. Open Interest collapsed by 12,000 contracts in the final day (difference between blue and green bars below). This is the largest drop in the final day for at least 24 months. Additionally, more contracts have been cash settled this month (red bar) since May of 2020 when the Comex was under a lot of delivery pressure.
Over the last year, each month has added contracts mid month to stand for delivery but July 2021 bucked the trend and cash settled. Why? Hard to know for certain, but perhaps the Comex physical market is under more strain than the stock report suggests. It could also be related to lower roll costs.
Figure 1: 24 month deliery and first notice
We can see in Figure 2 below how this most recent month stacks up more directly with other major months. Figure 2 shows that Silver deliveries are the lowest since March of 2020 and well below the record last July.
Figure 2: Recent like-month delivery volume
To put this past July in historical perspective, see Figure 3 below. This shows the month of July dating back to 2011, when Silver had seen its last major run up to $50. The chart shows the dollar amount of Silver being delivered rather than the number of contracts. Because there are 5,000 ounces per contract, this is calculated by taking the (Number of contracts) * (price of Silver) * (5,000).
While this month did not approach the record from last July, it is still high by historical standards.
Figure 3: Notional Deliveries
Jumping ahead to August shows that Silver has not necessarily lost its momentum. August is a minor delivery month for Silver, but the trend (red line) is still moving up as First Position approaches.
Figure 4: Open Interest Countdown
The chart below provides historical contracts, showing the delivery activity in the last minor months. As can be seen, April and June were both fairly high compared to the previous months. August is sitting at the same spot as June 2021. It will be interesting to see if it continues rising. Additionally, tracking cash settlement in August after First Position will show whether the cash settlement from July is a one-off or part of a new trend.
Figure 5: Historical Deliveries
The charts below follow the same order as the silver charts above.
July Gold is a minor delivery month. At 1,939 contracts delivered so far, it is nearly double the 1,011 contracts from First Position with 72 contracts still outstanding. While good to see 1,000 contracts to open and stand for immediate delivery, Figure 6 and 7 should help put this into context. The minor months are significantly below the major months.
Figure 6: 24 month deliery and first notice
July has fallen well below the trend from prior minor months.
Figure 7: Recent like-month delivery volume
Looking historically at July, the most recent July is still well above average, but not meaningful when compared to the major months.
Figure 8: Notional Deliveries
August Gold is a major delivery month and the contract has started to roll. It’s impossible to know how many contracts will be open on First Position because most will roll or close between now and then.
Figure 9: Open Interest Countdown
The last several major month delivery pattern shows a clear downtrend. It will be interesting to watch if this trend continues or is able to reverse some. Figure 11 below shows the “Cost to Roll”. Being very low, it’s hard to imaging a large number of contracts standing for delivery unless they see immediate risk at the Comex.
Figure 10: Historical Deliveries
The cost to roll is the difference between the current month and the next major month. It is very low compared to recent months. If this turns negative, it could be a bullish sign as investors discount more time in a contract rather than pay a premium. Currently this is just low but not negative.
Figure 11: Roll Cost
Silver is still showing some strength despite a disappointing delivery amount for July. Gold needs to reverse course soon in order to recapture some of the near record deliveries from 2020.
Figure 12: Annual Deliveries
Data Source: https://www.cmegroup.com/
Data Updated: Nightly around 11PM Eastern
Last Updated: Jul 27, 2021
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/