Chaos in gold markets ripples to other precious metals

On Monday, first-notice data for the July silver contract on the Comex in New York showed the largest single day of deliveries in almost 25 years. Deliveries for platinum on the New York Mercantile Exchange were more than five times the next largest month this year.

Those deliveries serve as a way for banks to reduce their exposure to price dislocations and limit risk, said David Holmes, a senior vice president at Heraeus Metals New York, a precious metals refiner.

The blowout in gold spreads earlier this year led to big losses for some banks, which typically sell futures in New York as a hedge for their positions in the London over-the-counter market. HSBC Holdings Plc. lost $200 million in a single day of trading, illustrating the challenges to banks due to the turmoil in the exchange-for-physical price, or EFP.

Wider spreads
Silver and platinum have been seeing similar price differentials. The spread between silver futures and spot prices ended the second quarter at the highest in nearly four decades. Platinum’s EFP spiked to the highest since early 2008. And palladium had the largest spread on record, dating back to late 1993.

The turmoil caused stockpiles to jump amid efforts to meet the apparent shortages. On-exchange inventories for silver and platinum surged to a record and remain close to those levels.

Meanwhile, futures positions have been shrinking in the wake of the pandemic-induced dislocations, creating a glut of metal akin to gold’s stockpiles. Platinum open interest, a tally of outstanding futures contracts, is near the lowest in eight years and is down more than 56% from a peak in January. Open interest in silver futures is down nearly a third from a February high. Gold positions reached the lowest in a year before recovering, while palladium is at a more than 16-year low.

“If a bank is short, it’s hard to close the arbitrage,” Holmes said. “Therefore, instead of increasing their position as the arbitrage grew wider, they’ve had to either hold constant their position or even reduce it.”