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LBMA Precious Metals Market Volumes: Turnover Figures for October 2021

Welcome to our monthly analysis of LBMA trading volumes for the major precious metals. Trading patterns varied across the precious metals suite during October.

By Rhona O’Connell, Head of Market Analysis, EMEA & Asia, StoneX Financial Ltd | Nov. 10, 2021

Welcome to our monthly analysis of LBMA trading volumes for the major precious metals. 

As usual, there are some interesting patterns to explore. 

Trading patterns varied across the precious metals suite during October. Spot volumes were down across the board when compared with the daily averages over the whole January-September period, with the notable exception of palladium, which was very busy. The falls were shallow in platinum, but gold was down 8% and silver, a hefty 26%. It looks as if, since gold reversed the bearish action of September over most of October, some market participants were uncertain about whether the trend had truly changed (prudent views, as it turned out), and this uncertainty would certainly have impinged on silver, given that metal’s renowned reputation for volatility and whipsaw action. In fact, the only derivatives in which gold and silver posted higher volumes in October than over the preceding months was LoanLeaseDeposit, with gold volumes up 84% and silver 11%. Platinum swap/forwards, options and LoanLeaseDeposit were much higher, but we believe there is a specific technical reason behind some of this, while palladium posted gains in swap/forwards but retreats in options and LoanLeaseDeposit. 

The key day last month for heavy volumes was Oct. 22, when the metals markets topped out in response to Fed Chair Jay Powell’s comments that it was “time to taper” the Fed’s net asset purchase program from the $120 billion per month that had been implemented in December 2021. The markets had been expecting this for a good while, but when he actually said it, especially with his comments that inflation would last longer than previously expected and that the Fed would use monetary tools, if necessary, a natural reaction ensued.

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 October, compared with the average for the first nine months of the year

Daily average trading volumes in September, compared with the average for the first eight months of the year

GOLD

Gold finished September by unwinding some of the losses that it had sustained over the month, after falling by 6% from (intraday) high to lows, between $1,834 and $1,722, before closing at $1,757. After a period of consolidation, essentially between $1,750 and $1,770 in the first week of October, gold moved higher in mid-month, largely prompted by the U.S. CPI figure, which came in higher than expected at +0.4% month on month and 5.4% year on year. The monthly changes are more important than the yearly numbers, as we are still shaking off the base effects from the pandemic during 2020. The October report for September showed a higher rate of change than in August, and this helped start a moderately short-lived bear phase for the dollar, but the key was Mr. Powell’s comments about “time to taper.” This led to quite a chunky steepening in the U.S. yield curve until as far out as the 10 -year tenors.   

All of this took some of the life out of gold’s rally, as well as coinciding with the $1,800 level. The overall upward trend carried through towards the end of the month, aided by an upside breakout from a technical wedge formation and support from a rising trend line, but the move did not unwind all of September’s losses as the market failed to build momentum. After a test of $1,815, the $1,800 level gave way again at end-month as the market readied itself for the outcome of the Federal Open Market Committee’s deliberations in early November, with an announcement of a tapering decision being increasingly discounted.

So much for the macro influences guiding gold’s trajectory in October; now to look more closely at volume patterns. As we have frequently noted before, the changes in direction were accompanied by the largest daily spot volumes; notably between 19 million and 22 million ounces on the 13th and the 15th, as gold’s quick rally through $1,800 was reversed. 

The other heaviest day was the 22nd, when 21 million ounces went through as gold pushed through $1,800 after the wedge formation was broken and technical factors kicked in, extended by momentum and algo trading. The average spot volume for the rest of the month was 16M ounces. Options were generally unremarkable, but it is interesting to note that there was a spike in activity on the first two days that pushed through $1,800 to the upside for an intraday range of $1,783 to $1,814.

There was a sense in the market during the month that miners were locking in forward prices, going out a number of years, which would indicate either mine financing, locking in prices over $1,800 in the second half of the month, or a combination of the two. The volumes in swaps and forwards and in LoanLeaseDeposit would certainly corroborate this. As gold traded higher in the wake of the CPI figures, swap/forwards exceeded 11.6 million ounces, 43% higher than the average for the rest of the month of 8.1 million, and LoanLeaseDeposit bounded up to an average of 35.3 million ounces. 

Forwards were not so lively in the second half, when gold was between $1,770 and $1,815, but this is where the LoanLeaseDeposit market kicks in; average volumes over this period was 31.3 million ounces against 27 million ounces in the first few days of the month.

LBMA TD: XAU TOTAL VOL

LBMA TD: XAU TOTAL VOL

SILVER

Generally speaking, silver’s volatility is easily twice that of gold, and when gold is showing a convincing trend, then silver will move in the same direction, but with roughly twice the size of gold’s change. Also, over the past ten years, the correlation between the two has averaged 81.

Not so in October. It was much livelier than that, as silver had some catching up to do. From the lows on Oct. 6 to the intraday peak on 22nd, gold’s range was 3.9%, from $1,746 to $1,814; silver posted its October lows at the start of the month at $21.99 and peaked, also on Oct. 22, a gain of 12.9%. So the beta in October was 3.3, wider than normal, and this may well have something to do with the fact that silver had been well and truly in the doldrums when both metals were on the slide, losing 13.9% to gold’s 6.1%.

Interestingly, the correlation between the two, while still high at 0.72, compared unfavorably not just with the ten-year average, but with September itself, when it was 0.79. The ratio narrowed between the two metals, as is almost invariably the case in the bull phase, closing at 75 from 78, and that an average for the year to date of 71. As far as trading is concerned, volumes were down across the board, apart from LoanLeaseDeposit, which was 11% higher than the daily average over January-September. As with gold, this would suggest that industry stakeholders were taking advantage of price moves in order, generally, to lock in higher prices, especially when “round numbers” were being breached in terms of price, although the highest volume of the month (16.9 million ounces) came a week after the bull phase had gone into reverse and just before month-end, suggesting that some of this activity was defensive. The fact that logistics supply chain issues are now hitting silver with metal now being flown, in some cases, rather than shipped because of the non-availability of cargo vessels, may also have meant that industrial users were looking to lock in priced supplies as some of this action took place on down-days as well as when prices were rising.

Spot turnover was down by 26% from the average for the rest of the year to date, which perhaps reflects a degree of caution about whether a new trend really was being established (it wasn’t) and may also reflect the tightness in shipping, keeping some would-be participants out for the market, while others were borrowing metal. Option business may have been deterred by the renewed volatility in the market.

LBMA TD: XAG TOTAL VOL

LBMA TD: XAG TOTAL VOL

PLATINUM 

Interesting patterns in the platinum market, as spot was off by 2% against the January-September average. Swap/forwards were up 10%, options 49% and LoanLeaseDeposit, 135%. The key to the latter is the fact that borrowing activity is an important part of the platinum market because of the amount of in-process material involved. This is material such as bushings in the fiberglass industry, bath linings for flat glass production, catalysts in the petrochemical industry for catalytic cracking and reforming, and so forth. Emission control catalysts currently account for ~40% of platinum industrial demand, and in this sector, the platinum goes into a catalyst, onto a vehicle and at end-of-life, gets recycled. In these other areas, platinum is part of the infrastructure for the processes, which is different and involves leasing as well as sale and purchase.

We wrote about this in the analysis of June’s trading activity, and it is worth re-capping. When these PGM-bearing components need replacing, for example, when a catalyst becomes spent, the industrial entity will borrow (or own) the necessary metal to add while the spent catalyst is recycled with the new metal in order to produce a fresh catalyst. This is known as closed-loop recycling in that the material in question stays within the production and recycling process and doesn’t get sold further downstream. It looks very much as if this is what is happening and that there has been some bunching in terms of dates.

Elsewhere there was one stand-out day in both spot and options volumes. This was “time to taper” day, Oct. 22, when the bull phase that has started at the beginning of the month went into reverse. 

Prices failed at $1,080, traded over a $37 or 3.5% range (which is not especially wide) and started the fall towards $1,000 over the following week. Spot registered 1.6 million ounces of turnover and options post 307,160 ounces; these numbers compare with averages for the rest of the month of 703,231 and 60,908 ounces, respectively. This was also the peak volume day for the LoanLeaseDeposit turnover, suggesting that prices were being locked in, although the spike was nowhere near as dramatic as in spot and options.

LBMA TD: XPT TOTAL VOL

LBMA TD: XPT TOTAL VOL

PALLADIUM

Palladium had an interesting month in October. Spot volumes were up 50%, and swap/forwards up by 32%. Options, though, had another month littered with days of no volume, while LoanLeaseDeposit was down by 37%.

With ~80% of palladium demand accounted for by the automotive sector, the semiconductor chip supply chain hiatus was permanently on market participants’ minds (and still is). The news out of the auto sector remained naggingly somber, with production cuts taking the headlines while hard data coming through in the form of corporate results, from companies such as Intel, for example, showed how the shortage has started to affect laptop sales as well as impinging on communications companies. 

The auto sector has been hit the worst, partly because in mid-2020, it was already living hand-to-mouth, and despite warnings from the semiconductor producers, they were not necessarily in a position to purchase for inventory. The financial results of the Taiwan Semiconductor Manufacturing Company (TSMC), which has 65% market share, are informative in this sense; the auto sector typically accounts for 4% or 5% of TSMC’s net revenue, way behind communications, for example, which is over 40%. More recently, the auto sector’s share has dropped to 2%.

There were three days of heavy volume in spot that skewed the overall monthly average. 

Take these out, and average volumes would have been just under 470,000 ounces, up by just 18% against the preceding nine months – but even that is a healthy increase. As it was, there were three days when volumes exceeded a million ounces, two of which were days of falls and just one moving to the upside.

Palladium’s price trajectory took a different path from the other metals in the precious suite, topping out in mid-month at just over $2,200 on the 14th and then drifting steadily lower to test the $1,940 level on more than one occasion just before month-end. The first day of heavy volume came in the second week under what looked like heavy profit-taking after prices had shot up in a short-covering rally, moving from $1,849 to $2,187 in just three trading days for a gain of 18% and hurtling headlong into overbought territory. This was largely triggered by the fact that the $1,850 level had four times withstood a test and did not fail, prompting shorts to lock in profits with the move extended by the usual influx of momentum trading, etc.

By the time the $2,200 level was reached, industrial demand, such as it was, had evaporated, and the ensuing fall towards $2,050 was the first day of heavy spot volumes as profits were locked in. Forward and LoanLeaseDeposit did not follow suit, suggesting that there was little hedging interest, although there were signs of interest when palladium cleared $1,900 at the start of the month. The final days of heavy volume came towards month-end after the $2,000 level had been showing a degree of resilience under test, and there was an effort to attack $2,100 with a turnover of 1.7 million ounces.

Powell’s “time to taper” day was pretty much ignored; palladium has enough problems of its own.

LBMA TD: XPD TOTAL VOL

LBMA TD: XPD TOTAL VOL

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