Gold and Silver Push Higher, But Next Week Could Be A Different Story

Precious Metals Market Update – February 24th, 2024 (CPM Group)

Key Concepts:

• ETF (Exchange Traded Fund): Investment funds traded on stock exchanges, offering exposure to precious metals without direct physical ownership.
• Comex: A division of the New York Mercantile Exchange (NYMEX) where precious metals futures contracts are traded.
• Good Delivery Bars: Standardized gold and silver bars accepted for delivery against Comex futures contracts.
• Open Interest: The total number of outstanding futures contracts for a specific commodity.
• Registered vs. Eligible Inventory (Comex): Registered inventories are readily available for delivery against futures contracts; eligible inventories require a transfer process.
• Arbitrage: Exploiting price differences for the same asset in different markets to generate profit.
• Fabrication Demand: Demand for precious metals used in industrial applications and manufacturing.
• Non-Commercial Investor Participants (Comex): Investors who are not commercial users of the metals (e.g., hedgers).

I. Gold Market Overview

CPM Group anticipates gold prices will rise this week, potentially weakening in early March before strengthening again in the second half of March. However, the typical seasonal sideways movement (second and third quarters) may be disrupted by prevailing political and economic conditions. Gold is currently trading around $2,051.86, testing $2,200, and remains at record levels despite being down $64 from yesterday’s close. The firm observed a similar deviation from seasonality in 2019 and last summer, where sideways movement was followed by price increases.

II. Investment Demand – Gold & Silver ETFs & Vault Holdings

In January, investors purchased approximately 3.1 million ounces of gold through ETFs. This contrasts with silver ETFs, where investors were net sellers. CPM Group notes that ETF investors are a mixed group, including long-term holders and short-term traders using ETFs for easier access to the market.

London Bullion Market Association (LBMA) data shows gold inventories rose by 6.4 million ounces in December, and CPM Group expects further increases of several million ounces in January and February. This is attributed to relative price differences between New York and London, as well as profit-taking by physical gold investors refining metal into good delivery bars for delivery into London.

III. Silver Market Dynamics

Silver is currently trading at $23.73, having reached $23.88 earlier in the day. The approaching delivery date for the March Comex silver futures contract is expected to provide support for prices this week, potentially followed by a slight pullback. However, silver is projected to remain above $22.60 in the near term.

IV. Comex Silver Futures – March Contract Analysis

As of February 20th, 219.9 million ounces of open interest in the March silver contract remained to be rolled forward. May contract open interest has increased significantly, from 125 million ounces at the end of January to 280 million ounces, indicating a shift in trading activity. Registered Comex inventories have decreased from 104 million ounces at the end of January to approximately 88 million ounces, while eligible inventories fell from 301 million to 276 million ounces, bringing total inventories down from 405 to 364 million ounces.

Jeffrey Christian emphasizes that 364 million ounces is not a significant drain on Comex inventories, as it remains near record levels. He clarifies that much of the reduction represents metal being shipped back to London. He states, “Anybody who tells you that the COMX is being drained is not being accurate in in what they tell you.”

V. London Silver Vaults & Arbitrage

Data reveals a significant flow of silver from London to New York in the first quarter of last year, driven by price arbitrage, concerns about potential tariffs on silver imports into the US, and stronger demand in the US. London inventories fell from 850 million ounces to 713 million ounces during this period.

The arbitrage reversed as tariffs were not implemented, and London became premium to New York, leading to a return flow of silver from New York to London. London inventories subsequently rose to approximately 890 million ounces, with a 20 million ounce increase in December alone. Christian explains this movement is driven by profit opportunities: “Why do people do that? Because they can make money. It's that simple.”

VI. Investor Positioning in Silver

Net investor open interest in silver on the Comex declined sharply from 221 million ounces (December 9th) to 120 million ounces (January 31st). Investors sold 29.8 million ounces of silver from ETF holdings in January. Despite this, ETF holdings remain substantial.

VII. Platinum & Palladium Market Updates

Platinum prices reached a record high near $3,000/oz, fueled by marketing hype, but have since consolidated. Investors added 54,000 ounces of platinum to ETFs in January. However, shorter-term investors on the NYMEX reduced their net long position by 35% (from 1.1 million to 724,000 ounces) between December 16th and January 31st, increasing short positions.

Palladium followed a similar pattern, with 63,000 ounces added to ETFs in January. Investors on the NYMEX reduced their net long position by 40% during the same period, also increasing short positions. This indicates growing caution among shorter-term investors.

VIII. Upcoming Events & Resources

CPM Group will host a “Silver Facts and Fantasies” online seminar on Thursday. Part one of the seminar will also be released on Friday. The team will be attending the Prospectors & Developers Association of Canada (PDAC) annual meeting in Toronto, hosting their 22nd annual silver reception. Resources, including yearbooks and special reports, are available on the CPM Group website (www.cpmgroup.com).

IX. Concluding Remarks

Jeffrey Christian stresses the importance of objectivity and realism in precious metals investing. He cautions against being swayed by hype and emphasizes the need for a research-driven approach. He states, “Just because you're realistic, just because you understand the supply and demand realities as opposed to the hype, doesn't mean that you're a bear.” He concludes by encouraging investors to focus on fundamental factors like supply, demand, and inventories rather than solely on price projections. He advocates for a balanced perspective, aiming for accuracy through “objectivity, knowledge and intelligence.”