By Rhona O’Connell, StoneX Financial Ltd
Any views expressed here are of the writer and do not reflect a house view either from StoneX Financial Ltd., nor from Nasdaq.
Daily February average compared with daily average for 2023
Source: LBMA
Source: LBMA
Welcome to our monthly round-up of the LBMA OTC trading volumes in gold, silver, platinum and palladium, as recorded on a daily basis by the Association. These are split into spot, swap/forward, options and LoanLeaseDeposit (LLD) and give a flavour of the markets’ activity and how they were influenced by external forces and news items.
General introduction: –
The above chart and table show that there were only a few areas in which February was busier, on average, than over the year 2023. Palladium activity picked up everywhere, while hedging activity was higher for gold and platinum, but otherwise everything else was down. One sparkling highlight, however, was LLD turnover in gold of 5.32M ounces (165t) on 8th February, the highest since 2nd November 2021 when gold had been oscillating around the $1,800 level with no discernible trend. This latest action looks like a three-to-four year hedge exercise.
All references to COMEX or NYMEX positioning refer to Managed Money, not commercial positions.
GOLD
Spot gold volumes, February, M ounces
Source: LBMA
After bottoming out in early October, rallying towards $2,100 and then easing towards $2,000 in January, gold spent February trading largely in a horizontal band between $2,000 and $2,050. Generally speaking, regardless of the asset class, a period like that means that the market builds up a head of pressure that ultimately results in a break-out. This time gold has broken out dramatically to the upside in March to post fresh record nominal highs in dollar terms and, indeed, in the majority of other currencies.
As noted above, LLD was the only sector in which gold’s daily turnover was higher than the 2023 average; the same to the differences with January turnover, so we will look at LLD first. Generally speaking the activity in LLD was featureless, with the exception of three, consecutive, heavy days on the 6th 7th and 8th. Taking those days out gives us a daily average turnover of 1.2M ounces (39t), but those three days averaged 4.1M ounces (127t) with the 8th posting 5.3M ounces (165t), the highest since 2nd November 2021 when gold had been oscillating around the $1,800 level with no discernible trend.
On these three days in February gold had been trading sideways between $2,023 and $2,045, having edged down from month-opening levels of $2,065. So this suggests that the exercise (or exercises) may have been the implementation of project finance hedges at the requirements of counterparty banks, or hedging against an increase in production, rather than opportunistic forward selling into strength. There wasn’t much change in the forward curve over this period, although by the 8th there was some tightening in the mid-2027 – 2028 rates so this could well be coming from a miner.
Elsewhere in gold, spot and swap/forwards activity were the opposite from the LLD. Volumes, while relatively low against historical turnover, were sizeable at the start, the middle and the end of the month, and, as we have seen so many times before, coincided with changes in direction and of course would have been responsible for those changes in trend, i.e. the failure at $2,050 at the start of the month, bargain hunting on the mid-month dip below $2,000 and then the build-up ahead of the March rally through $2,050 and onwards. There was some activity in the options market at the start of the month, but otherwise they were very quiet.
Gold in key local currencies, January 2023 to date
Source: Bloomberg, StoneX
In the background, Exchange Traded Products remained continued to see net redemption. For the whole of 2023, the World Gold Council (the most reliable source) shows a fall of 244t (funds exodus of $14.7Bn), leaving holdings at yearend of 3,226t, AUM $214.4 Bn. In 2024 to end-February the losses were 100t, with a 73t drop in North America (4.4%), 32 t down in Europe (2.2%) and a 4.5% or six tonne gain in Asia. This left holdings at month-end of 3,126t. World mine production is roughly 3,650t.
The Money Managers’ activity on COMEX came out all square over the month with a 13t drop in longs offset by a similar contraction in shorts, leaving the outright numbers at 323t and 148t respectively, for a net long of 175t, compared with a 12-month average of 175t.
Spot silver volumes, February, M ounces
Source: LBMA
The contraction in silver volumes was less pronounced than in gold when taken against the whole of 2023 and also against January 2024, with the sole exception of the drop in actions activity in the latter. As usual silver was more volatile than gold with a low-to-high range of 7.2% against gold’s 3.6%, although gold’s high was posted at the start of the month and silver’s was in the middle.
Gold, silver, the correlation and the ratio, January 2023-to-date
Source: Bloomberg, StoneX
Spot volumes were down 5% against the average for the whole of 2023, but down 10% against January. Swaps/forwards and options were at their liveliest in mid-month, just after a rally had failed at $23 and helped to fuel a sharp one-day fall to $22; this suggests some nervous price discovery and defensive options activity on the first day, followed potentially by industrial buying interest at the lows; in silver’s usual volatile fashion, the three days from 14-16th inclusive saw a run up to the highs for the month at $23.50, this time accompanied by fresh spot interest – bargain hunting here, too. The LLD sector saw its highest volume on the 15th as prices approached $23 so it does look as if, from all angles, this market was nervous of changes in direction and was looking to pick up bargains on the one hand, then lock into strength on the other.
Meanwhile in the background the US Energy Information Administration released a study on 15th February that could have helped the price bounce, with the conclusion that 81% of new capacity in 2024 in the United States would be solar and batteries. Projected installation of solar is put at 36.4GW (58% of total), which would equate to roughly 660t of silver. This is small by comparison with the overall size of the silver market (demand roughly 30,000tpa globally) but is double the rate of installation in 2023 and serves as a reminder of the very strong expectations for the solar industry, which by 2027 could be taking up 11,000tpa of silver against the current 6,200t – a gain of almost 5,000t or 16% of the present global fabrication demand.
The rest of the month saw increased spot volumes across the board, apart from options, with liquidation and forward selling down to below $22.50 and yet another reversal at month-end as gold started its aggressive run – although at the outset silver was less enthusiastic than usual about following suit.
Exchange Traded Products saw some sporadic bargain hunting activity but there were only six such days and the net redemption over the month was 335t, or less than 2% of total holdings. On COMEX there was a very small (73t) increase in outright longs to 5,352t while shorts expanded heavily to by 31% or 1,425t to 6,008t, leaving the market ripe for a short-covering rally.
PLATINUM
As we noted in January, the falls in palladium and rhodium prices mean that some platinum primary supply is under threat, notably in South Africa, while NorNickel has also said in its results statement that its platinum and palladium production are expected to be down by 12% this year – although part of that is ascribed to geopolitical circumstances and changes in infrastructure plans.
The problems with power supplies from Eskom in South Africa are showing no signs of abating and it looks as if at least 15t of platinum is building up as work-in-progress, as some ore has been mined but not fully treated because of power supply restrictions. The miners are all reporting substantial damage to their bottom lines last year and while restructuring at the moment is affecting workforce headcount rather than outright production, the CEO of one major has said that if the restructuring plans aren’t effective enough then the company will consider some shaft closures.
For now, these disruptions are more likely to affect the forward curve than the outright spot price given that the metal will eventually reach the market.
Spot platinum volumes, February, 000 ounces
Source: LBMA
Again, as we noted in January, the programme for substituting some palladium automotive emission control catalysts loadings with platinum, reflecting the period at the start of the decade when palladium was at a hefty premium to platinum, is due to complete during the third quarter of next year. It is possible that we will see some reverse substitution after this, but given the onward march of vehicle electrification it is not yet clear how much money the market stakeholders would be prepared to commit to retooling an instrument that will eventually become redundant. More of this in the palladium section.
Meanwhile the markets are still looking to the prospect for platinum usage in fuel cells over the longer term as the vehicle fleet electrifies, while diesel usage, especially in off-road vehicles and in China, remains solid, although diesel vehicles now only comprise roughly 30% of the European vehicle purchases; for many years, largely due to favourable taxation policies, diesel comprised more than 50% of European vehicle purchases.
Platinum continued its downward trajectory in the first half of February, opening the month at $922 and printing a low of $870 on the 9th. After a couple of days treading water platinum developed a rally towards $920, but this proved unsustainable and prices again went into reverse, to finish the month at $880 before starting a March rally. In the mid-month period palladium was also under pressure (again) and for a couple of days the two metals traded at parity or with platinum at a small premium; we are expecting a stronger premium to be established later this year. For now, though, palladium remains the higher-priced of the two metals.
Price influences in the short term included the NorNickel results in mid-month, when platinum was at its lowest, in which the company reported a 15% fall in consolidated revenue in 2023, although operating costs were also reduced, due in part to operating efficiencies. The South African producers generally reported in early March and will be discussed in our next publication.
Trading patterns: here too the options market was virtually dormant, while swaps/forwards were up fractionally against the 2023 daily average. Spot trading was down just 2%, the stand-out was the LLD market, which was up 61% against the 2023 average, although only 5% over January 2024. This heightened activity came about initially near the start of the month as platinum slipped below $900, and then again after a failed rally through $900 towards month-end. While some of this may have been nervous producer hedging it is possible also that there has been activity in the industrial sector such as glass or petrochemicals, which use a lot of leased metal and where changes in capacity can affect borrowing activity.
Spot and forward activity was relatively busy at the start of the month as platinum slid below $900 and then again at month-end, all of which suggests that $900 took on an increasingly psychologically important role in the market during February.
Spot platinum and NYMEX inventories, five-year view
Source: Bloomberg, StoneX
Exchange-Traded Products were mixed during February, with just nine days of net purchase from 21 trading days; the result was a very small drop of just 50kg to a total of 92.1t, compared with world refined production of 224t. On NYMEX, meanwhile, the outright short side was all over the place, jumping up and down in ways that suggest speculative jobbing of the market – albeit that such a strategy would be dangerous. Over the month these shorts started at 46t, expanded to 71t by 13th, then short covering developed that helped the mid-month rally, dropping to 65t and then posting a modest expansion into the down-dip at month-end to finish at 68t. Longs expanded over most of the month from 45t to 56t and then there was a mild sell-off at month-end, to 50t. February thus closed with a net short of 18t.
PALLADIUM
Palladium spot volumes, February, 000 ounces
Source: LBMA
Palladium remains under a cloud and is likely to do so for the foreseeable future. That said, the massive price falls of the past three years (apart from the short-lived spike in early 2022) have taken the spot price below the $1,000 level to six-year lows and the premium to platinum has come down to just $30 in early January and it is only a matter of time before the two cross over. As noted in the section on platinum, the past eighteen months or so have seen platinum encroaching on palladium’s role in the emission control catalysts in the auto sector, as a result of the massive premium that palladium had been enjoying over platinum prices. That programme will be complete somewhere between June and August 2025. Whether there is any subsequent reverse engineering is still open to question given that ICE vehicle production is being eroded by electric vehicles, but given that this path to full electrification will take at least another 15 years we should probably be ready for some shift in tooling once more.
Platinum, palladium, and the correlation
Source: Bloomberg, StoneX
Palladium was the only metal in the suite to post gains in all sectors against the daily 2023 averages, although after a busy January, volumes were down month on month and exceptionally so in the options sector, which saw very little activity. The first part of the month was busier than the second, with LLD picking up volumes first along with swaps and forwards and with spot joining in a couple of days later. Spot remained relatively lively over the month, as did the forwards, but to a lesser extent while LLD faded away.
The price profile was similar, in the main, to that of platinum although when in mid-month palladium released its previous downward course, the rally from lows of $854 was a strong one. Initially there was a one-day gain of $63 or 11%, setting the scene for some consolidation just below $100 and for further short-covering gains in early March.
It is well-documented that there have been record high short positions in palladium and with poor fundamentals for the longer term ,but the possibility of supply disruption in the nearer time horizon if South African producers do indeed need to close shafts (and we have already seen that NorNickel, the world’s largest palladium producer, is expecting a 12% reduction in its output this year, which will help take the market into a global deficit). And that very sharp rally came just three trading days after the NorNickel release.
Prior to that, as the price slipped in the first week, LLD was active, suggesting industrial demand or possibly some nervous producer hedging. Spot activity picked up smartly post NorNickel and through the strong rally, then faded on the approach to $1,000, suggesting that appetite was waning. Prices slipped, suggesting that spot activity had been biased towards the bid, and this would seem to be confirmed as volumes picked up again in the month-end rally. February finished with heightened volumes in all sectors as $950 was attacked and initially repelled, before giving way in early March as prices soared through $1,050.
Those CFTC numbers from NYMEX show that the outright shorts expanded to a massive 49t in mid-month before contracting slightly to 47t during the rally and then again, but only marginally, to 46t at month-end. No doubt the early March numbers will show a bigger change.
Exchange Traded Products, like platinum, saw some sporadic interest during February, with ten days of net creations from a total of 21t, for a net gain of 350kg to a total of 17.3t. This is an increase of 1.3t and suggests that there had been some positioning ahead of a short covering rally and possible glitches in supply.
In January we said, “This nervous and illiquid market that will at some stage generate another short-covering rally, but the overriding sentiment is that any strength in price (barring exogenous shocks) will be generated by short-covering and nothing else”. Barring supply disruptions, we see little reason to modify that view.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.