By Rhona O’Connell, Head of Market Analysis, EMEA & Asia, StoneX Financial Ltd | March 10, 2022
Welcome to our round-up of precious metals activity in February 2022 and a look at the context helping to influence market volumes – and vice versa. In the spot market, gold was up by a dramatic 22% against the previous twelve months, and palladium volumes were up by 7%. Silver was off by 13%, and platinum was marginally slower. Spot gold trading on February 2, at a thumping 47.4M ounces (1,473t), was by far the highest all the way back to at least to the start of 2021; we look at that stand-out performance below.
In the derivatives, gold options activity was up even more, with a 73% gain, but industrial activity was lower, with swap/forwards down a touch and LoanLeaseDeposit (LLD) down by more than 60%. Silver derivatives were generally higher.
Platinum and palladium were down across the board, apart from the spot palladium market, as noted above.
Now we will examine the patterns in each of the individual metals and set them into context.
Daily average trading volumes in February, compared with February 2021-January 2022
Without the massive volumes on February 2, gold’s spot daily average, at 19.6M ounces, would have been 14% up on the previous twelve months. As things stand, the overall gain was 22%. The massive surge in spot volumes on the 2nd was not mirrored in swaps/forwards and LLD, while option activity was below average.
What was behind the activity on that day? The only price-related feature was the fact that spot was pulling out of a sharp downturn in the final week of January when it had reversed the gentle uptrend of much of the month and dropped from $1,850 to an intraday low of $1,780 over three days. The 1st of the month saw spot straddle $1,800, and the range was much the same on the 2nd – narrow, between $1,795 and $1,801. There was nothing of note in the technicals either, beyond the fact that gold had been oversold in late January and was unwinding that position, although spot did cross the 50-day moving average to the upside.
In the background, it is possible that sentiment was affected by the U.S. Institute of Supply Management Purchasing Management survey, released the previous day, which showed the 21st consecutive month of increase, with particular strength in the new orders index and a long-ish list of commodities in short supply. It is possible that those elements, combined with dovish comments from some Fed officials (pressure on the dollar) and increasing tension over President Putin’s intentions towards Ukraine and the psychological importance of $1,800, were enough to prompt fresh buying interest.
In the futures, the CFTC figures for the week to February 8 did show a substantial bullish move in the positioning of the Money Managers (fresh longs plus short covering), which tends to underpin this view. Spot activity then died away for a week or so before returning to more normal levels (17‑21M ounces daily) in mid-month. In the background, higher prices were starting to hit physical demand, but while this would have reduced some physical buy-side trading, this would have been partially offset by the return of scrap and the funneling of metal back to the refineries.
Gold and Brent first continuation on the day of the invasion; strong relationship on fear (oil) and safe haven (gold) considerations
Activity in the forwards and in LLD was generally quiet in the first half, apart from February 9 when LLD posted a 2.2M ounce turnover (daily average 0.85M) as prices reached a new Fibonacci resistance level at $1,836 (again aided by a weaker dollar and intensifying inflation fears ahead of the U.S. CPI number), which may have prompted some operators to lock in forward prices. In the event, the CPI number was 7.5% Y/Y, although if we interpolate that back to January 2019, before pandemic dislocations, the average annual CPI for the period was 3.7% – still well above the Fed’s target level.
The invasion of Ukraine, which started on February 24, did not generate any abnormal volume in spot, but this is probably not that surprising since the expectations had been building for some time. The net change over the day was, in fact, a small loss, but not before a rapid 3% gain to test $1,975 and then sliding back to close at $1,904. Forwards, by contrast, were very busy, suggesting some hedging activity, while the LLD business picked up over the majority of the final days of the month as prices started the bull run that extended into March.
Of 19 trading days in February, silver posted price gains on 14 and losses on just five, building a rising trend that persisted into early March; this trend mirrored that of gold, while the gold: silver ratio, as is usually the case in a bull phase, narrowed as silver outperformed to the upside. As far as trading activity was concerned, spot volumes were down 13% against the previous twelve-month average but were only 3.5% off from January; in the derivatives, volumes were marginally higher than in the preceding 12 months (although LLD was up by a healthy 13%), but across the board, they were fractionally below January levels – with one particular exception in the options; see below.
The chart above displays aggregated trading volumes across all instruments over the month, which masks the gradual increase in spot turnover, which was offset by reductions in the derivatives, especially the forwards. This is interesting as it potentially suggests that market participants, wary of the rising tensions over Ukraine, were talking a bullish view of the market and not, therefore, locking in forward prices (this assessment of sentiment tallies with CFTC numbers; see below). The notable exception was right at the start of the month when silver tested (and initially failed at) $23 and then mid-month when it was approaching $24.
Thereafter forward volumes contracted markedly, as did LLD, including on the day of the invasion, when market participants preferred to stay on the sidelines.
Gold and silver; six-month view
There was one stand-out day in the options sector, notably the 16th, which was the day after silver had dropped from $24.00 to touch $23.08 and closed at $23.36. The open volume increased substantially that day, although it tailed off thereafter, but does potentially suggest that the $23 level was being increasingly seen as a support level and prompted some fresh call option activity after the previous day’s decline.
Tying in this activity with what was happening on COMEX managed money positions reflects increasingly bullish sentiment. After an early dip in long-side positions, longs increased and shorts were covered through the rest of the month, with a massive increase in the final week in response to the escalation of issues in Ukraine. While OTC participants may have been cautious at the outset, speculative and hedge fund players were not, so that by March 1, the net silver long stood at 6,890t, against an average of 3,265t in the earlier weeks of the year and an average of 4,484t over 2021.
Platinum’s month was relatively quiet, with volumes generally unremarkable but the odd burst of activity here and there. Turnover was down against January across the board, especially in options, although the LLD market held up relatively well in the first half of the month at least. Falls against the past twelve months were less dramatic, with the exception of LLD.
In price terms, platinum spent the first half of the month trading in the same narrow $1,000-$1,050 range that established itself in mid-January, before moving higher mid-month to test $1,100, a level which at that point at least, offered successful resistance. Spot and options volumes in the first half were relatively low, although spot built up some momentum as the market geared up for its test of $1,100. The biggest volume of the month came on the 17th, the day of the test of $1,100.
Unusually, the reversal day that followed traded in thin volume. We have noted many times that reversals normally take place with high turnover; this time, it looks as if buying fell away rather than any aggressive selling developing. Although Russia only accounts for roughly 10% of world platinum production and there has been no sign of any sanctions that would affect Norilsk (plus the fact that platinum is in surplus and the auto sector is still struggling), the increasing tensions over Ukraine helped to inform bullish sentiment, and it is perhaps not surprising, therefore, that sellers were reluctant.
That is, until the classic “buy the rumor, sell the fact” syndrome that affected the other precious metals applied to platinum also on the day of the invasion, with spot trading in wide ranges and putting in a “down day” that took prices back to the support band reaching up to $1,050 and paving the way for the fresh strength in early March.
Spot platinum, January 2021 to February 2022
As far as the derivatives are concerned, the options market only really showed any life in mid-month as the price looked to be shifting up in range, and indeed activity in the middle of the month suggests that the $1,100 strike may well have been in play. The forward market was only really active when $1,050 was taken out, while LLD was busiest in the first half of the month, and the volumes here suggest that this $1,050 level was attracting substantial interest – and it is arguable that this activity may have been instrumental in defending that level, at least until mid-month.
Until the final few days of February, consolidation was the name of the game for palladium. In price terms, most of the month was spent in narrow ranges between $1,175 and $2,440 before volatility set in at month-end ahead of a leap higher in early March as sanctions in other sectors kicked in, even though the LPPM did not take Russian platinum or palladium off Good Delivery lists when LBMA was suspending the Russian gold and silver refineries. In keeping with the rest of the sector, palladium traded a wide range on the day of the invasion, ending it in the red before prices headed for the stratosphere in early March.
February price action looked positively anemic when compared with what went before – and especially given what followed. The first half of the month saw low volumes more or less everywhere, reflecting, to some extent, the fact that industrial demand remains very quiet. Spot didn’t come to life until the second half, with a boost in volumes on the back of a downward reversal on the 17th and bargain hunting the following two days (prices edging up towards $2,450), then another reversal after a second failure at $2,450; all of which suggests that this was largely a jobbing market over the period. Finally, at month-end, as the market was preparing to launch higher, spot volumes picked up again to close at just below $2,500 as conditions became increasingly febrile about what might or might not happen to supply, given that Russia accounts for roughly 40% of global palladium production.
Forwards were also livelier in the second half, although they fell right away as prices moved towards $2,500. Options were very quiet, and LLD only showed any signs of life on two occasions; the first when spot was testing $2,200, suggesting possibly some long-side forward cover coming in; and the second on the day of the invasion when spot was swinging between $2,720 and $2,330, which perhaps implies some forward selling.
On balance, though, the paucity of industrial interest remains a key fundamental. Over on NYMEX, the CFTC figures show a reluctance to establish fresh longs, but plenty of short-covering, which underlines the market’s perception of weak demand-side interest, uncertainty about the outlook for the conflict, but also the reluctance to be exposed on the short side.
Spot palladium and the spread with platinum; six-month view
Nonetheless, palladium prices went from oversold conditions below $1,600 in mid-December to end the year just below $2,000. For much of January, prices were consolidating in a narrow range between $1,840 and $1,940 before taking off again in mid-month, to close January at just over $2,450 (this also was a Fibonacci resistance level, but this time it was the 61.8% retracement). Trading activity during these moves was not that spectacular, though. At the start of January, spot and forward volumes picked up as the price trend reversed from bear to bull, and the market mood would suggest that the forward activity may well have been forward buying on Russia/Ukraine concerns allied to a longer-term expectation for the auto sector’s recovery.
In the background, positions were being reduced on both sides of the Managed Money markets, with the outright long slimming from 6.2t at the start of January to 5.3t at the start of February. Outright shorts, however, contracted from 13.8t to 5.6t over the period.
Then at the end of the month, with prices testing $2,400, LoanLeaseDeposit volumes rose substantially, implying some supply-side hedging.
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