Mid-Week, Weekly Review of Gold, Silver and Palladium November 18 2020

Gold and silver price movements were more subdued this week with the front month contract for gold up 0.49% and silver up 0.77% at the close of trading yesterday, with respect to the close on November 10^th, 2020. The ratio of the month 1 Gold contract to the month 1 Silver contract (Figure 1) is down 0.3% compared to the close on the 10^th. The ratio continues to move sideways, still not giving any clear direction for gold. As a reminder, a falling ratio often implies gold may move due to the economics of silver. With the front month gold and silver contracts closing yesterday at $1884.50 and $24.64, respectively, the gold/silver ratio is now 76.5, 16.15% higher than the corresponding 15-year average. December gold (Figure 2) closed yesterday at $1885.10, up 0.46% and March silver (Figure 3) closed at $24.77, up 0.67% from the close on November 10^th.  It should be noted that silver March open interest is now higher than December, so we have moved to the March silver contract.

From an open interest perspective, gold’s total open interest rose 2% over the last week, holding near levels seen since August. Volume is once again below the 50-day SMA. The latest CFTC report for gold (11/10) for non-commercial net position of funds shows net positions continuing to fall, nearing levels seen in June and down 40% from the all-time high in February.  While both non-commercial short and long positions are falling, non-commercial longs are falling faster. It is interesting to note that while non-commercials are reducing net exposure, total open interest has remained stable, and implied volatility skew has moved slightly to favor higher priced calls over the last 5 trading days.

Now onto silver… Silver total open interest rose 3.8% since last week (November 10^th) and is up 5% for the last two weeks, regaining levels lost after the election with volume is near the 50-day SMA. The latest CFTC data (from 11/10) show non-commercials continue to increase their net long positions by reducing their short positions while the total open positions (futures + options volume) are on a downward trend.

Now for Palladium. December palladium closed at $2326.5 yesterday, giving back 5.86% from the close last week Tuesday. Total open interest fell 1.8% from Tuesday last week but is still up 8% over the last two weeks.  Palladium volume also continues to remain above its 50-day SMA. The November 10^th CFTC report showed a huge 50.3% increase in non-commercial net fund positions which effectively erases the anomaly from last week.  This result is a slight increase in net long non-commercial positions from two weeks ago. We mentioned last week that the price of palladium did not track with the reduction in net long positions, possibly resulting in some short covering.  This may be the case, and palladium’s fall in price may be giving some of that back plus continued concerns from COVID as well as additional news that automakers continue to substitute platinum for palladium.

The final thoughts I leave you with today are regarding the price of palladium.  The World Platinum Investment Council released its quarterly report today, which can be found here. The first six pages are an overview by CEO Paul Wilson, who provides background on several items. These include supply, demand, and substitution of platinum for palladium. He mentions what investment is available for exploration, is shifting into palladium-heavy fields versus platinum fields. This may make more platinum available in the future. In addition, as demand for catalytic elements is increasing due to more vehicles and more stringent pollution standards for both Europe and China, the $1,000 premium for palladium over platinum is driving OEMs to substitute more platinum for palladium. He also says this substitution is at a 1:1 exchange of platinum for palladium. The real amounts substituted is confidential and he believes this substitution “…is far greater than limited public information might suggest and that substitution volumes [platinum] are likely to increase rapidly in 2021 and beyond as the successful replacement of palladium by platinum is applied to a higher potion of new gasoline and diesel models launched.” While many of these changes will take time to implement, the changes to platinum to palladium may be occurring faster than expected and could possibly put downward pressure on palladium in the near future, especially as this news is digested.  However, overall demand may continue to improve with additional catalyst need.