By Rhona O’Connell, Head of Market Analysis, EMEA & Asia, StoneX Financial Ltd | Aug. 16, 2021
Welcome to our monthly analysis of LBMA trading volumes for the major precious metals. As usual, there are some interesting patterns to explore.
Summer doldrums prevailed over the precious metals for much of July, although individual patterns differed. Although average trading volumes for gold and silver were lower in July than for the six-month average over the first half-year, June’s declining trend was reversed in the case of gold, while silver trends over the month were broadly flat. Platinum volumes also increased, but not to the levels enjoyed in mid-June before a retreat, while palladium extended June’s decline until late July when conditions revived a little.
As ever, heavy volumes were almost always followed by changes in trend, or at least a correction, as sentiment changes, so some positions are opened while others are closed.
Daily average trading volumes in July, compared with the average for the first six months of the year
Gold opened July on the lows for the month as the price started a gradual recovery from the 8% fall posted in June; after an “up” day at the end of June, July opened at $1,770. The first couple of days were quiet in the spot markets as the new quarter (or, in some cases, fiscal first quarter) of the year got underway. Forward and Loan/lease/deposits were busy, however, suggesting that hedging activity was taking place at the start of the quarter. In fact, the spot – December spread flipped briefly into backwardation on Monday, July 5 (and again at the end of the month), prompting some easing in the forward volumes. Spot volume picked up in the second week as gold traded above $1,800, which prompted some profit-taking, but this was overwhelmed by fresh buying interest that carried spot up towards several tests of $1,830 over the month as a whole with Jerome Powell regularly asserting that the Fed would remain supportive with loose monetary policy for as long as necessary. The high CPI reading (which at 0.9% month-on-month) was again regarded by many as” transitory” as base effects from a year earlier (the annual gain was 5.4%) continue to fall away. The key element here is less the absolute level of inflation than the persistence of negative real interest rates, as a small bout of inflation is a useful lubricant for an economy. Where this has been intermittently working against gold is that the United States’ nominal interest rates, while still historically low, have been attracting overseas investors into the U.S. bond markets in the hunt for yield, however meager. This was, during July at least, supportive for the dollar, and this helped to keep a cap on gold price advances.
The round numbers do also seem to have had something of a psychological effect in the market, with high volumes developing in the forwards on the second test of $1,820 in mid-month and then again two days later when $1,830 was challenged. At this stage, all the technical signals were showing gold as overbought, so a natural correction ensued. Much of the rest of the month was lackluster as the summer doldrums developed.
Uncertainty over the economic impact of the resurgence of the delta variant was a key informer of sentiment in the silver market in July. Silver demand is approximately 60% industrial, and this, combined with gold’s narrow price ranges in July, meant that silver was under a cloud for much of the month, with the gold: silver ratio widening from 67 at the start of the month to a peak of 73 just before month-end ahead of a small correction. The fact that the vast majority of silver supply is price-inelastic will have contributed to the weakness, especially as India, which accounts for over 20% of jewelry and silverware made in any normal year, has been struggling with lockdown in the face of the virus and this has taken an important supportive strut away from the market.
After a quiet start across all areas of the market, silver spot volumes jumped on the first Tuesday of the month as the price tested and failed at $27, above which there is a band of resistance formed by congestion above $27 in the first half of June. Then two days later, we saw one of the heavy-volume direction-changing days, as participants responded to what looked like solid support at $26, and a small, shallow, bull phase ensued. Then the same process developed in reverse when prices turned down on the 16th, coinciding with falling consumer confidence numbers in the United States – again related to uncertainty over economic prospects due to the delta variant. This took silver down towards $25, where it held for a while in waning spot and forward volumes. The narrow ranges that persisted over the following few days reduced volatility naturally, and this prompted some activity in the options sector. The final move up towards $26 at month-end also generated action in the forwards, presaging further bearish action in early August.
While both metals traded in narrow ranges over July, silver’s volatility was, as usual, higher than that of gold, with a range of 25% against 5%. The key difference is that while gold was sideways, silver was bearish.
Platinum started the month on an upbeat note, continuing the bull phase that had started in mid-June when prices had dropped towards $1,025. The strength was relatively short-lived, however, with the market topping out in mid-month at $1,150, followed by some steep declines, as the markets continued to struggle with semiconductor shortages that have been preventing automakers from completing the manufacture of vehicles, with the result that there is a growing inventory of cars and trucks waiting to come onto the forecourt (and the prices of second-hand- vehicles has consistently exceeded the price of their new counterparts). This has affected platinum and palladium demand; the auto sector accounts for approximately 40% of platinum demand in any one year, and it is particularly effective in diesel, so any shortfall in the heavy-duty market will affect platinum accordingly.
The spot market started the month quietly, although there was some lively activity in the option and loan/lease/deposit market at the start of the month, coinciding with a sharp drop in price, which suggests that either auto manufacturers were offloading material or there may have been some hedging coming through from the supply side. For the month as a whole, the loan/lease/deposit sector posted volumes 23% higher than the average for the first six months of the year. Spot volumes were 11% higher, and swaps/forwards were 18% better.
Some of this heightened activity also coincided with intraday gains, and in this instance, the loan/lease activity may have reflected the owning or refurbishment of an industrial plant. Platinum is widely used as baths for float glass, bushings for fiberglass and as a catalyst in the chemical and petrochemical sector. Much of this is in-process material, and the user will frequently borrow metals to cover requirements while spent catalysts are being recycled, for example.
Spot bargain hunting developed in the second week of July after prices had dropped below $1,100, and this followed throughout in good size as prices worked back up towards that level. There is resistance above, dating back to mid-June, and the uncertainty in the markets overall meant that platinum did not have the legs to advance further, and this started the downtrend that persisted for the next three weeks. Spot volumes suggest that the market saw weak-handed longs flushed out in the second half of the month.
Whereas the auto sector accounts for roughly 40% of platinum demand, it accounts for over 80% of palladium demand in a normal year. Here, too, there was an unusual amount of activity in the loan/lease/deposit sector in July, with volumes coming in 63% higher than the monthly average for the first six months. In the other sector, volumes were down by 5% in spot and on either side of 6% in options and swap/forwards.
The poor state of the semiconductor supply chain meant that palladium underperformed platinum for the final three weeks of July. In common with the rest of the metals, faltering consumer confidence contributed to a sharp price drop in mid-month, before a period of narrow-range stabilization that has fed through into August. A sell recommendation from one of the leading investment banks, pointing to platinum’ starting to substitute for palladium in some automotive applications is likely also to have been influential.
Unlike the other metals, though, palladium started with high volumes in all sectors bar spot. This followed a $430 rally in the final few days of June and suggests that market participants were locking in high prices. The approach to $2,900 proved too much, however, and the bull run came to a halt under heavy volumes in the loan/lease/deposit sector – again suggesting some hedging into strength. The heavy fall which covered three days in mid-July took place in comparatively light volume, which is not unusual, but once the spot price reached $2,600, fresh bargain hunting appeared and reversed the course. Volumes drifted lower thereafter until the final few days of the month, when prices rallied under lively swap/forward activity, suggesting industrial users taking some forward over as $2,600 support proved effective.
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