Gold and Silver Delivery Requests Near 1 Year Highs, Prompting Cash Settlements
by Peter Schiff, Schiff Gold:
Note: This analysis focuses on gold and silver physical delivery on the Comex. See the article What is the Comex for more detail. Additionally, numbers from Comex for December 1 are still preliminary as of publishing. Numbers may change some.
This Comex delivery analysis is usually published on First Notice Day. This is directly after First Position day. The Open Interest on the close of First Position is usually a great indication of what delivery volume the month will see. These are when contracts must post 100% collateral for their futures contract.
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For example, current margin requirements on gold is $7,500 or about 4%. This is why traders love futures contracts, they get massive leverage (25 to 1) on their investment. As the contract month nears expiry, traders start to roll their contracts. This can be seen in Figure 5 and Figure 11 of the Comex countdown. If the contracts do not roll by First Notice, the contract holder must post the full value of their contract. This means anyone holding a contract at minimum margin must post the additional $171,500 per contract. Thus begins the delivery process.
Once First Notice occurs, buyers and sellers are matched up. Note, this does not mean physical delivery actually occurs. The warrant from the seller is passed off to the buyer. The warrant is associated with physical metal in a Comex vault known as Eligible (not Registered). If the warrant holder now wants to take actual physical delivery of their Eligible metal, they go through a process and the metal then leaves the Comex vault. This is tracked in a separate analysis which has been showing relatively large drops in inventory.
The majority of the warrants transfer ownership in the first day or two after First Notice. This December saw two breaks in trend for both gold and silver. First, the number of contracts standing for delivery saw a big increase relative to previous major months. Second, the bulk of actual delivery/warrant exchange took 3 days to occur. This article was delayed to try and get more data and understand the situation before publishing results.
Silver: Recent Delivery Month
The chart below shows the number of contracts delivered so far, now three days into the delivery window. December has broken the trend that has been in place for the last 7 months of continually declining delivery requests (except the Reddit silver squeeze in March). This chart does not include the 952 remaining open interest contracts, which would bring the total to over 9,000.
Figure: 1 Recent like-month delivery volume
Figure 2 below shows a more complete picture. The green bars are the number of contracts on First Position that will be posting full margin requirements. The blue bar is the day before which shows the number of contracts that rolled in the final day when compared to the green bar. The orange bar shows the number of contracts delivered, while the purple bar shows the remaining open interest (only relevant for the most recent month).
The final red bar shows the change in contracts after First Notice. While small, this value is typically positive. This represents contracts that open mid-month posting an immediate 100% margin to take delivery. Last month 741 contracts were opened for delivery. So far this month, 433 contracts have actually been closed and cash-settled (up from 15 a day earlier). This means instead of delivering a warrant, the seller delivers cash, presumably at a premium (otherwise why would the buyer take the deal).
For reference, 1,015 contracts were cash-settled in July, 107 last December, and 1,499 in May 2020. The past 4 months have seen contracts opened after First Notice, and December is seeing contracts close without delivery.
Figure: 2 24 month delivery and first notice
Another change in trend was the speed at which deliveries occurred. The chart below attempts to show the current situation relative to past major months. Based on the contracts outstanding at First Position, this chart shows the percentage of contracts delivered on First Notice and the days following. As shown below, typically more than 50% of contracts are delivered on First Notice (green bar). By the day after, this number starts nearing 75% (orange bar).
For December 2021, only 26% of contracts were delivered on First Notice, with only 33% delivered by the day after. Even December last year saw higher volume by day 2 (51%) and December 2019 saw 44% delivered by day 2. Then, yesterday saw a massive surge in delivery, bringing the total to 85.4%. Why the delay and then the recent surge?
Figure: 3 Notional Deliveries
Finally, the chart below shows notional/dollar deliveries for December. 2021 is sitting at $905B. The remaining contracts represent $110M, which would be just shy of the December record set last year. A new record is not out of the question yet though depending on how many contracts are opened mid-month!
A second analysis of this data will be done leading up to January delivery, so keep a lookout near the end of December to see what happens!