The London silver squeeze has eased for now, but expect another one soon
This article first appeared on SchiffGold.
The CME Comex is the Exchange where futures are traded for gold, silver, and other commodities. The CME also allows futures buyers to turn their contracts into physical metal through delivery. You can find more detail on the CME here (e.g., vault types, major/minor months, delivery explanation, historical data, etc.).
The data below looks at contract delivery where the ownership of physical metal changes hands within CME vaults. It also shows data that details the movement of metal in and out of CME vaults. It is very possible that if there is a run on the dollar, and a flight into gold, this is the data that will show early warning signs.
Figure 1: Spot vs Futures
Gold has seen massive delivery demand for the month of October. This is by far the biggest October on record, which is always somewhere between a major month and minor month. You can see the past two Octobers with the elevated orange dots representing the number of contracts delivered relative to the peak open interest. At 80%, this October is way above past months.
Figure 2: Recent like-month delivery volume
Net new contracts (contracts that open and settle for immediate delivery) was a major driver. Around 30k of the 58k contracts were delivered as net new deliveries.
Figure 3: Cumulative Net New Contracts
That metal has been removed from registered immediately, meaning it is no longer available for delivery.
Figure 4: Inventory Data
Looking ahead to the November delivery period, we see a slightly elevated contract. November is one of the quietest delivery months of the year, so this would be considered above average for November.
Figure 5: Open Interest Countdown
With the massive surge in inventory, the open interest relative to physical stocks is actually lower. This shows how much metal has been added to Comex vaults this year.
Figure 6: Open Interest Countdown Percent
Bottom line, demand for physical gold is still very strong. This should keep a floor under prices that are seeing a much needed correction.
The Comex saw unprecedented delivery volume in gold after the election as highlighted in previous articles. This was driven by an arbitrage between the spot and futures market. The opposite has now occurred in Silver. Silver saw spikes that forced metal to be flown to New York from London. The spike down shown below, caused metal to be flown to London from New York. This was to help address a silver squeeze that happened as bullion supplies dropped in London.
Figure 7: Spot vs Futures
Silver is a minor month in October, but still saw extremely elevated delivery volume, represeting 250% of the peak open interest for the month.
Figure 8: Recent like-month delivery volume
Similar to gold, net new contracts were a massive driver this month.
Figure 9: Cumulative Net New Contracts
Silver eligible inventories are seeing outflows to satisfy the demand in London.
Figure 10: Inventory Data
Registered has also seen a big drop, making less metal available for delivery.
Figure 11: Inventory Data
As we approach November (another minor month), the silver contract has remained elevated.
Figure 12: Open Interest Countdown
On a relative basis, open interest is in a normal range, but that is only because of the elevated inventory levels.
Figure 13: Open Interest Countdown Percent
Earlier this year, there was massive delivery in gold and London had to help ease physical pressures. The same happened with silver but in reverse as the Comex came to rescue London. This data is ringing the alarm bells. Physical supplies are stretched and people are waking up to this fact. Both metals have entered a much needed price correction, but the fundamentals that drove the price spikes are very much at play.
Bottom line, there is not enough physical silver and gold to satisfy global demand. The game of musical chairs has started and it is far from over. The silver squeeze may have been eased for now, but it’s only a matter of time before it resumes again in earnest. One day, there won’t be another vault half way around the world that can come to the rescue for both gold and silver.