LBMA Precious Metals Market Volumes: Turnover Figures for August 2023

By Rhona O’Connell, Head of Market Analysis, EMEA & Asia, StoneX Financial Ltd | Sept. 13, 2023

Any views expressed here are of the writer and do not reflect a house view either from StoneX Financial Ltd. or from NASDAQ.

Welcome to our monthly round-up of the LBMA OTC trading volumes in gold, silver, platinum and palladium, as recorded on a daily basis by the Association. These are split into spot, swap/forward, options and LoanLeaseDeposit (LLD) and give a flavor of the markets’ activity and how they were influenced by external forces and news items.

Daily August average compared with daily average for calendar 2022

As the chart above shows, daily average volumes were generally better in August than in the previous twelve months for gold and silver, especially silver forwards and LLD, while platinum was mixed and the struggling palladium market was very quiet. In price terms, gold, platinum and especially silver were on the defensive in the first half of the month before recovering, while palladium was actually relatively robust initially, but once again, this was a false start, and prices drifted lower over the second half.

The dollar worked gradually higher over the month but only gained narrowly and, as such, was less of an influence than it has been in the past. That said, while the dollar’s intra-month range was narrow, the metals traced wider ranges, although the difference between start and finish was less than 1% in either direction, apart from platinum, which enjoyed some fresh interest and gained 4% over the month as a whole, mainly on short covering.

Probably a key influence on market sentiment overall was the Jackson Hole Economic Symposium, which is an annual gathering of central bankers. The significance this time was that the markets are actively debating whether the Fed has finished its rate cycle (consensus is that it has not), whether there will be a hike in the Sept. 19-20 meeting or on the 31st October / 1st November iteration; and whether rate cuts will develop in 2024. What made this one even more significant is that the members of the Federal Open Market Committee go into ten days’ purdah ahead of each FOMC meeting, and so none of them are allowed to pronounce publicly on monetary policy over that period. With Jackson Hole, that is not the case, so there were plenty of comments coming from Committee members before Jay Powell made his address. Clearly, this was most significant for gold in terms of short-term trading, but the wider global implications are also important for other hard commodities.

Powell preserved the position of the Fed, as usual, emphasizing that they would “proceed carefully – subject, of course, to inflation not coming in too high, or the labor market remaining tight.” So he understandably wanted to keep some room for maneuver, and the feeling among observers is that although inflation is still too high, it is going in the right direction and that the Fed has time to wait for yet more data before committing.  

The European Central Bank arguably has more of a problem, with inflation still above 5% (likely to drop fairly rapidly in the fourth quarter but with Germany teetering into recession).

With a stream of disappointing numbers coming through from China, the overall economic tone during August was very cautious and contributed to the lethargic price action across the metals. So let’s turn to them individually.

GOLD

Gold entered August on the defensive, slipping lower from the test of $1,980 in mid-July and starting August in the region of $1,940. The Moody’s Ratings Agency downgrade of some small-to-medium United States banks (which are key to the backbone of the US economy) gave some support, while Fitch downgraded the United States’ credit rating; this latter also gave some initial support, but ultimately, the rise in bond yields, also in response to the downgrade, held sway and gold remained under pressure. At this point, the technical picture was deteriorating, with the 10-day moving average crossing below the 20-day, which almost invariably puts prices under a cloud. Comments from Michelle Bowman, a member of the Federal Reserve Board of Governors, responded to a mixed labor report (employment numbers softer but wages picking up slightly) by saying that the Fed might need “additional rate increases” in order to attain the 2% inflation target and while this is nothing new, it helped to keep gold on the back foot.

Spot gold volumes, August, M ounces

The reversal came in mid-month after physical support, thought to include central banks as well as private institutions, emerged at prices below $1,900 and stopped the rot. This was just a couple of days before Jackson Hole and formed the foundation of a rally towards $1,950 that ran out of steam at the start of September, and the reversal was helped by the fact that the interest rate cut in China was smaller than the markets had been expecting (although subsequent events have seen a change in Chinese policy – more of that in the October note).

With Jackson Hole on the horizon, no one was really prepared to commit in either direction, so again, the price became subject to technical considerations after the prior bargain-hunting activity had brought it back above $1,900. This all helped to prompt the test of $1,950, but with physical conditions still quiet and professional investors not prepared to push on, the rally fizzled, and September started, like August, on the defensive.

Gold: The key technicals and the inverted dollar

As far as trading patterns were concerned, overall volumes were largely unremarkable. Spot, swap/forwards and options were all roughly 10% above the average over the previous twelve months, although increased activity from hedging programs meant that LLD was some 17% higher.

August started with some lively activity in swap/forwards and LLD, suggesting fresh technical activity and possible mine producer selling. 

Spot trading was at a minimum at this point, but the liveliest day for spot by far was Friday, August 4. 

This was one of only two days in the downswing when the price rode higher, and it’s possible that this was prompted by the downgrade discussed above. As the rally, which was pretty anemic, failed, more LLD activity cascaded through the market over the following week, taking prices to the lows of the month and suggesting more mine hedging. Shallow price moves in mid-month prompted some options activity, presumably reflecting low volatility. The rally in the second half of August saw increasing spot activity, underpinning anecdotal evidence of fresh bargain hunting off the back of the support at the lower levels, while swap/forwards and LLD faded away as participants stood back to assess the strength and sustainability of the rally – which as it turned out, was fragile.

There were 23 trading days in August. Only five of those saw ETF creations, and all the rest saw redemptions for a net loss of 47t tonnes (a drop of just 1.6%) against end-July tonnage. On COMEX, Managed Money outright long positions dropped in the first two weeks, from 412t in late July to 327t just before Jackson Hole, at which point there was some fresh interest up to 375t, while the physical support in the market in mid-month stemmed the tide of fresh shorts that had developed in the first half, and generating covering in from 299t to 253t.

SILVER

Spot silver volumes, August, M ounces

Gold, silver, the correlation and the ratio, January 2017 to date

Gold and silver prices moved more or less in tandem during August, and as usual, with silver’s higher volatility, silver’s low-to-high trading range of 12.5% was wider than that of gold – this time by a factor of 3.1. Silver’s second-half recovery was marginally better than gold, with gold starting the month on the high and silver ending it there (but then reversing smartly in early September). The patterns of trading volumes differed, however, so that while silver prices were predominantly influenced by what gold was doing, the markets’ different constituencies were reflected in the trading shifts. Spot silver trading was relatively subdued, at the same level as the daily average of the previous twelve months. Conditions were very brisk at the start of August, very similar to gold, with the heaviest swap/forward day on the 3rd. This was after silver had dropped sharply from the month’s opening of $24.75 and touched $23.50, which may well have encouraged some forward buying interest, as it was the precursor to an “up-day” thereafter, with heavy spot volumes.  

This was a false dawn, though, as, in common with gold, the downtrend was re-established, bringing with it continued activity and some options volume on the 8th as the $23 level gave way and then again on the 10th – another short-lived positive day before the last downward leg. Prices bottomed on the 15th at just over $22.

The strong rally in the second half of the month, with a 12% rise to test $25, was in thin conditions until right at month-end when flows built up in all the segments. Swap/forwards and LLD activity suggest forward selling and hedging activity. Options were also busy despite the swift move in price – so the emphasis may have been on selling options rather than potential buyers looking for positions.

Elsewhere:

While gold saw just five days of ETP creations in August, silver saw six, of which there was only one day when both metals holdings rose. Otherwise, silver was also under pressure, losing a total of 454t. Set against end-July holdings of 22,717t, though, this is a drop of just less than 2%. As such, it is not especially significant, but the continued downward trend reflects the lack of interest – which has also been seen in the coin and small bar markets, which have remained sluggish. 

Trading on the long side of the Money Managers’ positions on COMEX was also similar to that of gold, with longs contracting in the first half of August and then rebuilding over the second half so that over the month, as a whole, they were virtually unchanged. Where things differed, however, was from the short side, whereas gold shorts increased for most of August, only retreating in the final week and finishing August substantially higher than four weeks previously. Silver shorts rose in the first half but then contracted dramatically, closing August 15% lower than they started. This is not that unusual; because of silver’s volatile nature, short-covering rallies in this market can be vicious, and speculators are often very quick to run for cover.

PLATINUM

Platinum was the outperformer among our four metals during August. The overall profile was similar to that of gold and silver, dipping in the first half and then recovering to post a net 4% increase and finishing the month just off the peak at $972. That strength was short-lived as early September told a different story, with the problems in China affecting sentiment on a fundamental basis. Platinum’s August rally was largely driven by short covering (see below for an analysis of NYMEX activity).

From the supply side, load-shedding in South Africa remained in the spotlight. When Eskom load-shedding reaches Stage Six, the miners, despite a degree of ring-fencing, are expected to reduce their power offtake by 15%. This could affect smelter activity, although, under Stage Six, mining operations would be unlikely to be affected, and so work-in-progress inventories would build up. Although most have been able to manage this reasonably effectively so far this year, recent results from the majors have shown that there has been some impact in the first half of the year with Impala, for example, recording a near 5% reduction in output in the financial year ending in June – although part of this was due to smelter maintenance. The inventory build may be channeled into the market in the second half of this year.

Load-shedding was still a factor in August and persisted into September. If it should reach Stage Eight, then mining activity itself may be affected.

Spot activity, as noted above, peaked in the final three days of the month and given that $980 had been a level of resistance previously, it is certainly possible that there was some profit-taking coming out at this stage.

Spot platinum volumes, August, 000 ounces

Meanwhile, the OTC trading volumes were lively. Although LLD was down 17% against the daily average over the previous 12 months, spot volumes were up 20%, swaps/forwards by 38% and options by 30%. Activity in the spot market was very largely concentrated in the last three days of the month, although there were some minor flurries of activity as prices declined in the first couple of weeks. While LLD was down overall, there were two days at the start of the month when volumes were high. In theory, this suggests that the rally at the end of July had prompted some hedging activity. Activity in LLDs has to be treated with caution, however, as there is a lot of leasing in the industrial side of the market (petrochemicals, glass manufacture, for example) and as catalysts and glass-making vessels come to the end of their working life they are sent to be recycled and the movement of the metal through these processes means that a lot of material is borrowed for interim replacement components.

Swaps and forwards are probably more illuminating in this instance, and there were bouts of activity in the first half as prices hovered around $920 and thereafter as prices found physical support and started an attempted rally from below $900 towards $920. There was another bout of interest in mid-month as prices severed $900 once more, and it is possible that this was buyers taking forward cover. Further intermittent bouts of activity came about through the rally and peaked as prices pushed up through $960 to challenge $980 (a challenge that failed).

Spot platinum and the dollar, year-to-date

The Money Managers on NYMEX clearly took mixed views of platinum in August. The enthusiasm surrounding the potential for fuel cells in the medium term dissipated to some extent during the month, as did the extension of China’s traffic emission control program through to the end of 2023 (previously scheduled for completion by the start of July); of more significance is the continued uncertainty over the Chinese economy. To that end, outright long positions increased by 25% (almost ten tonnes) over the five weeks between July 25 and August 29 before liquidation set in towards month-end. Shorts, meanwhile, expanded by 35t (225%) in the three weeks from July 25 to August 15 before stabilizing then a massive drop of 26t in the final week of the month and another large contraction in the week following, which will certainly have extended the move.

Investors in ETPs were net buyers on just nine days of the 23, and the funds shed 1.1t (1.2%) to close August at 97.7t, compared with global mine industrial demand of roughly 240 tonnes per annum.

PALLADIUM

Palladium spot volumes, August, tonnes

Much as we noted last month, palladium is still floundering in the face of long-term adversity as the march towards net zero carbon and vehicle electrification moves ever forward. Even if the major 2030 and 2040 targets are not met (and there are always headwinds for a major change such as this), then the fact that there are – at present - no scaleable uses for palladium in electric vehicles will leave a gaping hole in its supply-demand balance from around the turn of the decade. Remember that the auto sector (before accounting for recycled material) accounts for over 80% of palladium demand, and if these optimistic targets are met, then by 2040, the auto sector will be a net supplier of palladium into the market, not a major consumer. The scrapped autocats sector is already the second largest producer of refined palladium, although when and if South Africa’s problems are resolved, then it may be nudged –if only temporarily - into third place.

That said, the decline in palladium prices has been losing momentum, and there have also been some signs of tentative industrial interest, notably from the auto sector in the States, and this has been giving prices something of a cushion. The $1,200 level appears to be a relatively solid base of support, and while August finished on a downbeat note, early September has seen a rally through the major moving averages – whether this turns out, like platinum, to have been driven in large part by short-covering, remains to be borne out in the numbers but it looks that way.

Meanwhile, in August itself, overall volumes were well down on the previous 12-months’ daily average. Spot was down 19%, swap/forwards 21%, options (never very lively in the first place) down 66% and LLD just 2%.  

The price downtrend that had started in March continued for the first week, with intraday prices slipping to a low of $1,203 before a very smart rally of three days’ duration generated a move of 11% to just over $1,340. There were anecdotal reports at the time of some auto-related buying in the United States, and there was little resistance on the chart until around $1,350, so the move, in that respect, wasn’t too much of a surprise after such a long period of decline.

Trading volumes saw heavy spot turnover during this move, plus increased life in the swap/forwards, which could well have come from the buy side, and this may have happened again as the rally was unwound; when prices slipped to $1,210, swap/forwards came through in heavy volume. They appeared once more in very heavy volume on the 22nd as prices moved sharply higher once more, through $1,250 and on towards $1,300 (where more resistance appeared and repelled the attack).

The final burst of activity came in the spot market at month-end, and with the market on the defensive again, this could well have been book-squaring ahead of month-end.

The Exchange Traded Products stayed well and truly side-lined with just five days of creations, and holdings dropped by just ten kilos, ending the month at 15.43t, compared with global industrial demand of roughly 300 tonnes per annum.

On NYMEX, the CFTC position hit another (then) record short. During August, the outright long Managed Money position continued to rise, although at a slower pace from July, and reached 11.1t in mid-month before retreating to 10.2t at month-end. Shorts, however, continued to bask in the sunlight and reached a (then) record of 40.5t early in August before some covering in, likely to be profit-taking, especially as news started filtering in about activity in the auto sector. By early September, however, we were back at a record with outright shorts of 43t and leaving the net position at 33t short, another record, potentially gearing the market up for further gains -and it does look, therefore, as if part of the rally in early September has been driven by short covering.

Platinum, palladium, and the correlation

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