LBMA Precious Metals Market Volumes: Turnover Figures for July 2022

By Rhona O’Connell, Head of Market Analysis, EMEA & Asia, StoneX Financial Ltd | Aug. 5, 2022

• Spot volumes up everywhere again except spot palladium
• All eyes were on the Fed, as usual, but this time, the ECB took the attention also
• Some industrial borrowing in platinum?
• The electronics sector’s losses are the automakers’ gains

Welcome to our round-up of precious metals activity in July 2022 and a look at the context helping to influence market volumes – and vice versa. When compared with the average for the previous twelve months, spot volumes were up everywhere except for palladium, which had a tough month all round; the OTC derivatives were generally lower, apart from gold forwards, which posted healthy gains. The markets, in general, remained in thrall to the malaise in the economic environment, especially in Europe, which has been bearing the brunt of the problems with energy supplies, and the debate about the global interest rate cycle kept speculative activity relatively thin, while investment was also largely side-lined, at least at the professional level, although gold price declines triggered some lively grassroots activity in most of the price-elastic investing regions.

In March, the LBMA suspended Good Delivery listing for gold and silver from six Russian refineries. The LPPM then announced on 8th April that certain Russian brands would be suspended. In 2021 Russian palladium production accounted for roughly 38% of the world’s total, and for platinum, roughly 10%. The impact on the platinum and palladium market of the suspension of the Russian brands was palpable in May, with volumes very substantially down in all segments when compared with the previous twelve months. After an uplift in June, palladium suffered in July, with volumes down both against the average of the previous twelve months and on a year-on-year basis.

Daily average trading volumes in July, compared with July 2021- June 2022

GOLD

Gold had something of a roller-coaster ride during July, with two periods described by one dealer as “wash-out,” with prices dropping rapidly. Opening at $1,807 (on an intraday basis), gold had dropped to a near sixteen-month low of $1,681 by the 21st before reversing and commencing a rally which, at the time of writing in early August, is showing signs of stabilization between $1,750 and $1,790.

Taken from the early March high of $2,070, gold’s fall to the late-July low was one of 19% as the war premium was unwound and the markets continued their obsession with the interest-rate cycle. Ordinarily, concerns over accelerating inflation would be supportive for gold, but in the post-Volcker era, interest rates have tended to be the more important parameter, especially as the dollar was being widely perceived as the key safe haven this time around. There are early signs that this may now be changing, but this too could be predicated on the dollar as there are some suggestions in the market that the dollar’s bull run may be drawing towards a close.

Meanwhile, the first July “wash-out,” when gold dropped from $1,812 to $1,739 in the two days immediately after the U.S. Independence Day, was largely dollar-driven, as it crested a 20-year high on increasing fears of a global recession, but then exacerbated by a factory orders number that was much stronger than expected, raising expectations for a thoroughly hawkish Federal Open Market Committee (FOMC) meeting towards the end of the month (which, indeed, turned out to be the case). 

Add to this an increasingly bearish technical picture, and the stage was set for a price fall. Spot volumes were among the heaviest for the month as market stakeholders bailed out, and there was sizeable activity in the forwards, suggesting some nervous forward cover. Options activity was high, implying an increase in put positions, and LoanLeaseDeposit (LLD) on the second day of the fall was twice the average of the preceding days as the price veered below $1,750. 

Spot gold and the correlation with the dollar and the MACD technical construction*

Volumes fell right away in the immediate aftermath of this first drop, improved again as more participants withdrew following the price’s inability to recover over $1,745 and then picked up smartly, taking spot to its lows. In mid-month, a 9.1% reading of the US CPI put the cat among the pigeons again as the market foresaw further hawkishness, bringing about more spot and forward selling.

The reversal, as usual, came in heavy volumes, with some positions closed and others opening as the market needed to unwind oversold conditions. News that the European Union was to ban imports of Russian gold had little impact on sentiment. What was of interest was the increase in volume in the swaps/forwards and LLD as prices rose, suggesting that some market members are nervous that prices have little further upside potential and were locking in positions.

SILVER

Silver prices finally came to life in late July as, for the first time in months, it rallied not only in line with gold but substantially outperformed, which is what it is supposed to do in normal circumstances. With the way that gold had been behaving in the face of interest rate concerns and with a highly uncertain economic backdrop, silver has been firmly in the doldrums and watching copper more closely than gold. In fact, the year-to-date correlation between silver and copper is higher than its correlation with gold, at 0.93 against 0.91.

Silver and the correlations with copper and with gold

Silver opened July in the middle of a well-established downtrend that had started at the end of May after a period of consolidation centered on $22. By July’s opening spot was $20.28 (intraday) and en route to the month’s low of $18.15 as the commodities sector overall took some hefty falls on recession and rate hike fears, as well as heightened concern over the economic outlook, especially in Europe.

It is worth remembering here that regardless of what silver demand is doing, the silver supply just keeps on coming. Only 28% of global mine supply is from primary silver mines, and industrial scrap adds a further 18% of largely price-inelastic material, meaning that only 22% of global silver supplies can have a classical market-clearing price attached to them (i.e., the price at which supply would have to contract in order to bring the market into balance, or a price at which the miners are loss-making). Faced with this relentless flow of material into the market, silver must take its cue from other sources.

The change of tone towards the end of the month and then into August suggest that July saw silver transition back towards gold as its primary lead, rather than copper. The fact that silver’s end-July rally, at 12.4%, was 2.4 times that of gold (5.2%) is roughly what we should expect when silver and gold are moving together, as silver is inherently more volatile than gold.

Trading conditions were thin and nervous at the start of the month as prices dropped and with the American markets closed for Independence Day. The big downward move on the 5th, moving from $20.20 to $19.10, came in heavy spot volumes. The derivatives were relatively quiet, but the following day, after silver had severed the $20 level, saw lively activity in the forwards as well as options and some LLD activity. This may have been both psychological and technically-driven and took silver into a mid-month period of low volume, trading around the $19 level. 

The drop to the month’s low, on July 14, was in heavy spot and forward activity and suggested that some of the forward activity may have come from the buy side as prices fell to a 25‑month low. Spot turnover was relatively lively over the following week while derivatives were side-lined, awaiting a resolution of the battle between buyers and sellers. 

The buyers won, and silver’s month-end rally started on 21st July with the highest spot turnover of the month. Spot volumes eased slightly over month-end, but forward activity was lively, as was LLD, suggesting a combination of forward selling and long-side forward interest as the move became more convincing.  

PLATINUM

Platinum finally started to find some support in mid-July after a vicious bear market that started, along with many other commodities, in early March. From an intraday high of $1,183, platinum hit a low of $830 on 14th July, a drop of $353, or 30%. The recovery in the latter half of July took spot to $918, and the momentum carried through into early August. From a technical standpoint, this move, while posting an outright gain of $89 or 9.7%, is not over-dramatic, and at the time of writing, the spot price is challenging resistance offered by the upper side of the downtrend channel.

The spot platinum sector was one of the very few that achieved a higher average daily turnover in July when compared with the previous twelve months, with a gain of 19%. 

The heaviest spot volumes were at the turn of the first and second weeks as the first effort at a rally lost momentum and turned downwards again; then, after a quiet period – which, unusually, included the reversal of the trend – the biggest volume was posted when the market was trying to establish a direction while tussling with the $950 level. 

Eventually (as we shall see also in palladium), the buyers proved more forceful and provided the springboard for further gains. 

There was some lively activity in swaps and forwards in the first week when prices were under pressure, which suggests forward sales as prices were failing at $900; activity in this sphere then fell right away until the end-month, when it picked up again during days of price losses as the $900 target was in sight, suggesting some market nervousness. In the LLD sector, where volume was 26% lower than in the previous twelve months, activity was sparse, but there was some action mid-month when prices were doing little, which suggests perhaps that there was some industrial borrowing for the replacement of in-process material in, for example, the petrochemical or glass industries. 

It was at this stage that some of the US automakers were noting that, because of problems in the electronics sector, they were starting to pick up enough semiconductor chips to enable them to work off some of their backlogs, and this will have helped sentiment. Allied to this, Taiwan Semiconductor Manufacturing said in mid-month that it was reducing its capital expenditure plans to the lower ban of its $40-$44Bn target, resulting from delays in its own raw material requirements, which adds another twist to the semiconductor chip shortage. At least three other chip makers have also reduced their expenditure plans with chip demand falling away (at least in the electronics sector) and rising costs.

So the electronics sector’s problems (essentially a falling away from the massive surge in demand for communication equipment when so many people were in lockdown) are the auto sector’s gain. The automotive sector typically absorbs ~40% of global platinum industrial demand.

PALLADIUM

Palladium started to recover before platinum, clambering out of its sharp bear phase during June, bottoming out in mid-month. July saw the price ebb and flow, but essentially the month’s action completed a ten-week period of basing out. It is too soon to say for certain that this is the case, given the prevailing economic uncertainties, but activity in the Managed Money positions on NYMEX and in the Exchange Traded Products suggests that here, too, there is some tentative interest returning to the market.

Palladium opened July at $1,940 (intraday), tested then failed at $2,200 ten days later, dropped back towards $1,800 by the 15th, then worked upwards to close at $2,196 (since then, the $2,200 level has so far provided resistance). 

Overall conditions were thin, with spot posting a 24% fall against the preceding twelve-month average, with swaps/forwards and options both down 32% and LLD a hefty 42%.  

This is clearly related to the suspension of the Russian refinery brands for LBMA Good Delivery Status. While the fundamental market overall is still operating, the lack of London clearing has made for thin and, therefore, volatile conditions, given that Russia typically supplies 38% of the world’s palladium.

Where volumes did pick up was in the spot sector during the early rally to the highs and particularly high volume of over half a million ounces as prices ran up towards $2,200. Technicals would suggest that some of this was momentum or CTA trading, as the activity was only in spot and not reflected in the forwards. 

Then, however, these elements did pick up smartly on the day of the reversal as the $2,200 level combined with heavily overbought conditions to entice some participants to lock in these high prices. The peak also coincided with reports of a recovery in China’s auto industry, but the core of this improvement was in the electric vehicle sector, which uses very little palladium (in contrast to the Internal Combustion Engine), and while this may not have affected short term sentiment directly, it was a reminder that in the long run, the outlook for palladium offtake is dark indeed. Similarly, the US CPI was released halfway through the decline, and the 61.1% Y/Y increase in gasoline prices will not have gone unnoticed.

The S&P 500 and the autos sub-sector

The recovery over the second half of the month, which had elicited some industrial interest, was in thin spot volumes, but there may well have been industrial forward interest as swaps/forwards posted some lively days. The other sectors were unremarkable. Palladium finished the month with another test of $2,200, which again put up stiff resistance, and there is a band of congestion sitting between $2,200 and $2,250.

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