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By Rhona O’Connell, Head of Market Analysis, EMEA & Asia, StoneX Financial Ltd | Nov. 14, 2022
- Spot volumes were down across the board against the daily averages for the previous twelve months, with the sole exceptions of silver and platinum spot volumes.
- On a year-on-year basis, the same applies apart from spot gold, which was higher this year than last.
- Platinum’s market has been revitalized, and with it, the price, while silver has come out of its near-catatonic state.
- On a snapshot basis, gold and silver were barely changed in dollar terms over the month (continuing the basing out exercise), while the PGMs were looking to the longer term, with platinum gaining 10% and palladium losing almost 18%.
- LoanLeaseDeposit (LLD) was down by over 20%, apart from palladium, which was only marginally lower (but after a good few months of contraction).
- The debate starts about how much further the long dollar-long yield trade has to go.
Welcome to our round-up of precious metals activity in October 2022 and a look at the context helping to influence market volumes – and vice versa.
As usual, the official sector commanded much attention in the gold market over October (and by association, silver as the old relationship between the two started to re-emerge (see the Silver section below). The September FOMC meeting had announced another 75-basis point rate hike, and debate then turned to what would happen in November – and latterly, as some of the U.S.’ economic numbers started to signal some signs of possible fissures in the country’s economic recovery, the debate turned to what would be announced in December. To pivot, or not to pivot?
At the end of September, the dollar hit its highest since late June 2002, as investors continued to see the greenback as the primary safe haven asset, bearing in mind the disconnect between the recovery in the U.S. economy against the continued problems in Europe and associated lack of consumer confidence. Chinese lockdowns and continued problems in the construction industry, in particular, continued to weigh on Chinese recovery prospects. Couple this with the U.S.’ rate cycle and gold, and by extension silver, were under a cloud for much of 2022 since the peaks in March, while palladium, reliant on the auto sector as to 80% of its global offtake, also remained under pressure from independent fundamental reasons, exacerbated by the dollar’s strength. All of these elements are intertwined, of course. Platinum sustained sizeable gains on growing expectations of a bright long-term future and, aided by technical (chart-based) formations, unwound 24% of its fall from the March peak (and kept rising through the first few days of November.
Daily average trading volumes in October, compared with October 2021 – August 2022
GOLD
Although the dollar eased slightly over October, the fall was less than 1% and certainly not enough on its own to stimulate a full-scale reversal in gold’s bear market of the previous seven months, but it helped to pave the way for fresh price gains in November and the continuance of a basing formation that started in September. In local terms, gold prices dropped in the major international currencies before starting rallies in November as sentiment started to change. On balance, then, October can potentially be seen as a month of transition.
Spot volumes were relatively thin in the first week, as prices rallied from $1,650 to $1,720 on disappointing U.S. manufacturing figures. Once the momentum failed and prices went into reverse, forward selling volumes picked up smartly, thus becoming both partial cause and effect of the start of the ensuing near two-week downward phase.
These forward volumes started to slow as prices approached $1,650 once more, suggesting not only that those programs were drawing to a close but also that participants were standing back to see whether any bargain-hunting, be it from a value or a chart-based standpoint (or both) would develop. Severance of $1,650 saw a final bout of forward activity (some of which could well have been buyers taking forward cover), and then prices drifted lower once more to close October at $1,639.
The subsequent price recovery was yet again inspired by market expectations over likely Fed activity. This time the move was triggered by press reports that some Committee members were concerned that the Fed might be at risk of over-doing the rate cycle, given that rates had already risen by 3% since March (when the metals markets had peaked). This took some further shine off the dollar, as weak as capping bond yields, and helped gold start its fresh upward path. This later rally did not see any fresh forward activity towards month-end as sentiment started to change, and the concentration of this activity into a small part of the month saw the overall forward volumes contract by 17% against the average over the previous twelve months.
Spot gold in euro, yen and Swiss franc terms, 2022 to early November
Source: Bloomberg, StoneX
There has been much talk of central bank activity in the markets of late and we should not discount the possibility that there has been official sector buying activity in the forward markets.
On the other side of the market, LLD activity was at its strongest early in the month, suggesting some mine hedging, especially as the price went towards $1,700 to the upside and then again as it broke down below both that same price level and key moving averages. For the rest of the month, however, activity in this sector was muted, and overall volumes were just 72% of the average over the previous twelve months.
While sentiment in the OTC market may have been inclining to the upside towards month end, the Exchange traded gold products remained defensive, shedding 60t over the month. The Money Managers on COMEX were also cautious but did appear as bargain hunters in the final week– but they were slightly outweighed by fresh shorts.
Over the month as a whole, the net position swung from an 86t long to a 27t short.
SILVER
Vibrant demand persists and starts to be reflected in spot prices
The major talking point in the silver market at the moment (and it kept on coming up at the LBMA/LPPM Conference in mid-October) is the vibrant strength in physical silver demand. This has been nowhere more evident than in India, where the awful state of the market in 2020 and 2021 has translated into strong pent-up demand in 2022, especially in the third quarter and into October (although conditions have quietened somewhat in early November)
Where this has hit the headlines has been the reduction in visible inventories in LBMA vaults, the Exchange Traded Products, and on the CME; since the start of this year, into the second week of November, over 15,000t have left these three sets of vaults combined, aiming for a range of destinations, India being the largest by far, by the look of it. To put this into context, Indian imports of silver are usually between 5,000 and 6,000 tonnes per annum (global demand around 35,000tpa including investment), and combined imports in 2020 and 2021 were just less than 4,000t, so expected imports in excess of 10,000t this year are not actually a longer-term distortion as they feed pent-up demand.
This demand, however, has not necessarily fed into spot prices, largely because it is being met by silver flows from terminal markets, but is being recognized in local premia, not just in India but elsewhere, especially in the coin market where retail investors are seeing a moving target and keep chasing it. Mints around the world are still on allocation, and it can prove difficult to meet the very strong grassroots demand, so premia are very high. The professional market, however, is also very deep. For example, take 2019, which was obviously prior to any pandemic-driven distortions; COMEX silver turnover was 3.8M tonnes, roughly 125 times the physical global demand that year. So the activity of professional funds is always going to govern the nuances of the spot price, and local premia will reflect what is going on at the base, as it were.
All that said, the OTC market in October saw a daily average spot turnover of 6,327t, or between 80 and 85-times global mine production. Turnover was up 9% against the previous twelve-month daily average and was up by 37% against October 2021. Price patterns followed the trends in gold, and the range between the high and the low, at 15%, was ~2.5 times that of gold (6.4%), which is typical for the relationship between the two metals, and the correlation was steady in the region of 0.85. The ratio widened in the first half of the month as prices of both metals fell, but as the prices stabilized in the third week and then started turning up, the ratio narrowed towards 80, the lowest since early April this year.
In terms of volumes, the sharp rally at the start of October was the highest of the month, and then turnover dwindled as prices turned down as the trend reversed. As usual, the first day of the reversal was in relatively high volume as some operators took profits just above $21, but some nervousness then set in.
The same can be said of the forward/swaps sector, suggesting some locking in of prices above $21, but there was also a surge in options volumes, which also suggests that the market saw $21, which was also heavily overbought at that point, as a natural ceiling at that stage (it was subsequently taken out in early November).
Gold, silver and the ratio
Source: Bloomberg, StoneX
The downtrend was in moderate volume in spot and forward/swap while options faded away, but there was also some lively activity in the LLD division as prices severed $20 to the downside. Turnover was light across the board over the rest of the month, suggesting that the market was looking to gold and the dollar for further guidance, and it is also arguable that the heavy demand outlined above was helping to cushion the weakness. As with gold, the professional market is crucial for determining trends, but the physical market can help cushion falls, although it is not strong enough to drive prices higher without the help of the professional sector.
PLATINUM
In our previous commentary, we noted that platinum, which was the second-weakest performer over the month (ahead of gold), had ended September with the net Money Managers’ positioning on NYMEX running a net short, albeit a small one. By the end of October, those Money Managers’ positions were in a long of 21t, the largest since late March, and a swing of 31t over the month. Outright long positions increased by 13t, and shorts contracted by 19t (numbers don’t add exactly due to rounding) as market participants looked to the longer-term prospects for platinum, notably in the fuel cell sector, and there were some reports of fresh industrial interest in the metal.
As a consequence, platinum was the outperformer of the four metals in October, and its strength means that it has outperformed its peers since the start of September also. After starting October at $868, not much higher than the year-to-date low of $821, platinum made gains, consolidated, and then made further gains to close the month at $931, a rise of over 8% and a Fibonacci retracement of 38% from the March-August fall.
The rally in early October saw platinum bounce up to $941 as the market concentrated on the slippage in the dollar (correlation over 0.70 over the month) as opposed to the longer-term influence of the settlement of the wage negotiations between Sibanye-Stillwater and the NUM and UASA in South Africa (the dispute with the third union, the Association of Mineworkers and Construction Union, or AMCU) was not settled until the end of the month. That final settlement means that the major PGM producers in South Africa have now all signed at least five-year agreements with the unions, which should hopefully ensure continued smooth supplies (subject of course to the risks of load-shedding from the power suppliers). In fact, the dollar was the key short-term driver throughout the month, with a very close parallel between the inverted dollar rate and the spot platinum price.
Sentiment was also helped by news of a new platinum-based green hydrogen plant, this time in Germany, using platinum-based Proton Exchange Membrane technology.
The mid-month downturn was relatively limited, with support consistently coming through in the $890 region, but momentum wilted once prices were challenging $950. The high for the month was $970, just before month-end, before fresh strength developed in November.
As far as trading patterns were concerned, spot activity was 15% higher than the preceding 12-month average and 23% above October 2021. The OTC derivative volumes were down substantially, however, with Swaps/Forwards down 45%, options by 70% and LLD by 60%. The downturn at the end of the first week, rather like silver, was in the lowest volume of the month as the markets became cautious, and then volumes picked thereafter; from Oct. 20-31, October average volumes were 33% higher than in the twelve months to September as buyers hurried to join the rally. Interest was also piqued by rumors that a European Commission report on Euro 7 emissions limits was only to favor particulates in diesel but made no mention of tighter gasoline limits. This helped boost platinum (which is key for particulate control ) and worked against palladium.
Swaps/Forwards activity suggests some forward selling as the early rally came to a stop, and then again towards month end as prices cleared intermediate highs above $925. Options trading was almost non-existent, while LLD was very low, with one notable exception. On 24th, absent this particular day, the daily average turnover in LLD was 76,862 ounces. On this day, however, the market traded 315,078 ounces. This was the day when platinum prices reached $950 and then turned lower, suggesting that there was substantial borrowing that could have pointed to fresh shorts; or, alternatively, that there was industrial borrowing going through the market to finance equipment change-out for recovery. The latter looks the more likely.
Platinum: Money Managers’ NYMEX positioning
Source: CFTC, StoneX
PALLADIUM
In terms of price action, palladium remained the under-performer among the precious metals during October, shedding almost 18% over the month. Along with the rest of the metals, palladium benefited from early dollar weakness, starting October at $2,169, reaching a high of $2,350 on the 4th and then sliding through the rest of the month with only partial respite between the 10th and 24th, centered on $2,000. The weakness thereafter saw palladium finish the month at $1,846 before some industrial interest appeared in early November and lifted prices slightly.
As noted in the platinum section, there were rumors during the month that a European Commission report on Euro 7 emissions limits was only to favor particulates in diesel but made no mention of tighter gasoline limits. This helped boost platinum (which is key for particulate control) and worked against palladium. The report itself was released in early November and will be discussed here next month, but in essence, it looks as if it is looking at the further control of the emission of nitrogen oxides in gasoline vehicles, which favors rhodium above any other.
Sentiment remains under a cloud with the auto sector still struggling, and the continued encroachment of electric vehicles into the Internal Combustion Engine market share, plus continued concern over the rate of recovery, or otherwise, in the Chinese economy, which is currently responsible for over 36% of car sales in the U.S., EU and China combined.
U.S., EU and China car sales (U.S. estimated); million units
Source: CFTC, StoneX
With Russian brands still suspended from LPPM accreditation, palladium volumes were again under pressure. Spot was down 21% against the preceding 12 months, Swaps/Forwards by 36% and LLD by 7%, and options trading was very faint, to put it mildly.
In trading terms, the heaviest spot volumes were in the run-up to $2,300 early on and will have included selling into strength as well as some technically driven trading as the 10-day moving average crossed the 20-day to the upside. Ironically the reversal of the technical indicators in mid-month saw only very light volumes in spot and in forwards, although there was some borrowing in the market as the month wore on, which is believed to reflect industrial interest.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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