Comex is up against the wall
This article first appeared on SchiffGold.
Silver has seen a relatively weak delivery to start the action in May. While this could be considered disappointing to some who were looking for fireworks, a look beneath the surface shows that all is not well.
Figure 1: Recent like-month delivery volume
We can see the path that silver took below, starting high and then dropping down into the close before seeing a big fall in the final day relative to past months (usually the last day moves more sideways).
This drop can be seen more clearly below by the difference between the blue and the green bars.
Figure 2: 24-month delivery and first notice
So how big a drop was this? On a relative basis, this was the largest drop since at least the start of Covid when deliveries started taking off. In the final day, the May contract decreased by 66%! While delivery volumes have been falling, the drops into close have been getting bigger. This is not a coincidence. Silver has been flooding out of Comex vaults and supplies are clearly getting thin.
It should be noted that the majority of these contracts did not roll to the next month. 5,099 contracts closed yesterday and only 1,067 were added to the July contract. This strongly suggests that these contract holders held until the very last day and then closed. Why? Most likely because they were convinced to not take delivery.
Figure 3: Drop into Close
How can we know they were convinced? We can’t… but let’s look at what May typically looks like. Keep in mind that less than half of contracts have been delivered so far. Still, delivery volume is historically low. Even with the remaining 1,606 contracts pending, that would only drive the total to $327M. This would be the smallest notional delivery in 5 of the last 6 years.
Figure 4: Notional Deliveries
Look at the next chart that shows the scramble to get metal into the proper category for delivery. There was a lot of action in early March, followed by steady outflows, which then turned into a bunch of reclassifications.
Okay - so we have bank failures (First Republic barely has a pulse down 36% today alone), a push to de-dollarize being made public, and gold very near all-time highs. And then delivery volume in silver is the smallest May in years because of a very last minute bulk contract closure? The data can only say so much, sometimes you need to read between the lines. This market is under stress! Will it break tomorrow? No (it’s also a Saturday), but how many more times can the Comex pull rabbits out of their hat?
Figure 5: Recent Monthly Stock Change
The house accounts are quiet so far this month. On net, they have delivered out a little less than half the contracts delivered so far.
Figure 6: House Account Activity
May silver is a minor month, but it looks like some contract holders yesterday did not want to wait until July to be “convinced” to roll. Open interest in the June contract popped 33% at the same time that May fell. Probably not a coincidence.
Figure 7: Open Interest Countdown
On a relative basis, June is now looking quite strong, only below the January contract.
Figure 8: Countdown Percent
Minor month delivery volume has been sliding quite a bit. Again, most likely because there isn’t that much metal to deliver. The vaults have been bled dry!
Figure 9: Historical Deliveries
The spread in the cash market is headed back down towards a potential backwardation.
Figure 10: Spot vs Futures
Gold has also started off a bit slow. This shouldn’t be a surprise though as the game in gold continues to be net new contracts.
Figure 11: Recent like-month delivery volume
This can be seen clearly in the chart below with red bars driving much of the volume in minor months. In January and last July, the contract opened the delivery period even weaker than this month (937 and 698 vs 1,128) but saw lots of activity mid-month. It wouldn’t be a surprise to see elevated net new contracts this month. Unlike silver, the Comex has been unable to calm down the delivery market in gold. This could partially because there is less silver available, and a bigger need in that market. Silver vaults have been pillaged way more than gold, but that is starting to change. JP Morgan had to restock after using almost their entire Eligible stack to defend gold deliveries last month.
Figure 12: 24-month delivery and first notice
Still, it is surprising that activity in gold is not higher. Given the banking issues, gold near all-time highs, and the de-dollarization talks, I would have expected the gold contract to be busier on its way into close. As the chart below shows, this month was definitely on the lower end of the range for minor months.
Figure 13: Open Interest Countdown
The May contract for gold is historically a small delivery month but saw quite large moves in 2020 and 2022 (right after Covid started and the Ukraine war).
Figure 14: Notional Deliveries
The House accounts are quiet so far with only a few contracts received on net. This follows a pretty substantial month last month.
Figure 15: House Account Activity
As mentioned above, JP Morgan had to deliver out a lot of gold last month. These were the two big moves shown below moving from Eligible to Registered. They then restocked their Eligible to replace what was lost. The vaults have been unable to restock in silver suggesting it is further along in the supply drain than gold is. Gold is also a much bigger market and has much bigger stakes if confidence were lost.
Figure 16: Recent Monthly Stock Change
The net action in gold can be seen below.
Figure 17: Recent Monthly Stock Change
Compare this to silver which has simply been straight down with any restocking immediately removed.
Figure 18: Recent Monthly Stock Change
Looking ahead to June shows gold in the middle of the pack. As mentioned in the technical analysis, one of the most bullish aspects of the current price move is that it has not come with a surge in open interest. This suggests buying coming from elsewhere and not likely from the weaker hands seen in futures traders. This is further confirmed by the chart below showing average open interest despite the near record prices.
Figure 19: Open Interest Countdown
Even on a basis relative to Registered, June is only slightly above average.
Figure 20: Countdown Percent
Delivery volume remains strong in major months, but considering the recent moves by JP Morgan, supplies may finally be getting thin enough that contract holders will start being “convinced” to roll as well. This June will be a good test to that theory.
Figure 21: Historical Deliveries
The market is still in strong contango.
Figure 22: Spreads
The cash market looks very well controlled, but with spreads getting a bit wider at each roll period.
Figure 23: Spot vs Futures
Watching this data reminds me of a saying:
“How did you go bankrupt?” “Very slowly at first, and then very quickly”
We are in the slow stage. In silver we could be reaching the point where things speed up though. The vaults can simply not sustain the withdraws that have been happening. Bottom line, we may still be several months or even a few years away from a major event in the Comex. I wouldn’t bet on having that much time though. The data suggests it is sooner than that. In either case, you don’t want to be caught wishing you had more gold and silver when things start to unravel.
Figure 24: Annual Deliveries
Data Source: https://www.cmegroup.com/
Data Updated: Nightly around 11PM Eastern
Last Updated: Apr 28, 2023
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/