Precious Metals 011425: Weekly round-up for StoneX Bullion; The EFP explained

Weekly roundup for StoneX Bullion                                                       14 January 2024

Rhona O'Connell, Head of Market Analysis, EMEA & Asia

 Tel: +44 203 580 6115 / mobile +44 7384 833897

We wish all our readers a very peaceful, happy and prosperous New Year.

• Gold was the best performing metal last year with an intra-year gain of 25.5%; silver was not far behind at 21.5%

• The New Year is again riddled with uncertainty and if anything there are more question marks this year than last

• We take a look at the rumours arising about silver and give some background that should help to explain matters and soothe fears

• Our “Metals Markets Outlook 2025”, which runs to 70 pages (largely charts with supporting text) will be published later this week; we expect further gains in gold and silver although it is arguable that gold will peak this year

• Silver’s long-term fundamentals are strong but this year may still be a year of transition, especially given the uncertain outlook for Europe’s economy and the time it will take for Chinese stimulus to filter through

Shorter term outlook; the gold market is still benefiting from the uncertainties running through the market ahead of the 20^th January inauguration and the ensuing Executive orders.  Much of these uncertainties are priced in, to an extent, and while the tailwinds are likely to keep any corrections shallow, there is also resistance at $2,730 and it is hard, if nothing else changes, to see gold clearing that in the near future.   The economic background will hinder silver in the short term, with resistance above $30.5.  Fears of a squeeze (tariff fears) can’t be discounted as perception is everything, but the fundamentals argue otherwise.

We finished last year talking about geopolitics and the gold and silver EFPs.  And that’s how we start this year also.  I have kept the definition and working of the EFP from our previous note, see below.  They were very volatile towards the end of last week, ahead of the inauguration on 20^th January of President-elect Trump.  As is the case in all markets, perception is frequently more important, in terms of market sentiment, than fundamentally driven logical projections.

What has happened here is that, with Mr. Trump postulating widespread tariffs and with Mexico and Canada accounting for 25% and 10% of US silver imports respectively, a number of market stakeholders have been getting metal into COMEX warehouses ahead of Inauguration Day, just in case.  While this has not necessarily affected spot prices, it has resulted in wide volatility in the EFPs, especially last Friday because that was ten days ahead of the inauguration, which coincides with how long it takes to get metal from London into New York warehouses.

There has been some press coverage about a persistent shortage of supply, so here is an outline of the background fundamentals of the market (I will also be publishing this into Market Intelligence and you will see it in the weekly slide deck).

The primary force behind the widening spread between COMEX and loco London is Risk Managers looking to pre-empt any tariff imposition (I find it hard to believe that silver will be affected, but you never know...) 

As far as a "shortage of mine supply" is concerned the picture is not that simple.

I treat the market dynamics slightly differently from most other analysts.  Ever since MF started identifying OTC silver investment as a line item (2011) I have been able to strip that out and look initially at the balance between overall supply and industrial demand (including jewellery and silverware).  You will see that until 2024 this was actually in surplus (and had been for the previous 14 years.  

Add in the OTC investment and we see that investors have been more than ready to mop up that surplus, and demand more metal on top of that, so that pushes the market into a deficit - but the point here is that IF the price were to rally hard it is perfectly possible that some of that metal would be mobilised under profit taking.

To put some numbers on that; the industrial surplus was just under 80,000t but investors bought a net 106,000t (excluding ETPs).

Then I add the ETP line, which sometimes is a course of demand and sometimes a source of supply.

LBMA silver vaulted holdings fell by 3,932t over 2023, equivalent to six weeks' global industrial demand.  Overall at end December 2024 they stood at 29,593t, equivalent to 47 weeks' global industrial demand.

COMEX silver inventories stood at 9,568t just before Mexico/Canada tariffs were mooted; since then they have added 524t (5%) to 10.091t, equivalent to 42% of overall open interest.

There is no doubt that the market is going into a steepening deficit and supply is not necessarily flexible enough to feed that demand, given that only 23% of silver supply comes from primary mine production, the rest is base metal by- or co-product, or from industrial scrap.

It's really important to bear in mind that silver is notoriously vulnerable to "conspiracy theories" and attempted squeezes.   For years I have referred to it as the "Cinderella metal" because she stays below stairs, not moving very much, for long periods of time and then when she does come to the party, she attracts lots of attention and every-one is dazzled.  But when midnight comes, she disappears faster than she arrived...

Silver supply by source, 2024 (e)

Source: Metals Focus, StoneX

So what is the EFP and how does it work?

“EFP” is the acronym for Exchange of futures for physical.  While the futures market forms part of the transaction, EFP trading is between two counterparties and is not centrally cleared.  Last week the gold EFP shot out to more than $60 between spot and the active contract (February 2025 in this case); i.e. between 2% and 3%; that of silver reached a dollar, or just over 3%. 

How does it work?  Trading the EFP is a way of hedging market exposure.  By buying the EFP, a holder of physical metal contracts with a counterparty to sell the physical position while simultaneously buying the futures.  That way the exposure in the metal itself is unchanged; but the delivery date shifts.  Some market stakeholders have been using the EFP in order to deliver metal into the United States ahead of 20^th January in order to reduce the risk attached to long positions in case of tariff imposition.  In our view tariffs on either metal, especially gold, are unlikely, but it is understandable that some traders – or their risk officers (as was the case during the pandemic) want to eliminate any possibility of being caught up in any fall-out.

Meanwhile the NonFarm Payroll numbers for December were, at +265k, a lot stronger than expected, driven by the private sector.  The retail sector added 43,400 jobs, manufacturing was healthy, leisure and hospitality likewise (+43,000).  although construction was only up by 8,000.  There was an increase in the number of people looking for work and they all found jobs.  Clearly one data point mustn’t be taken in isolation, but the overall trends in US numbers have illustrated an economy whose strength has confounded even some economists and this, coupled with the change of Administration, is now fuelling speculation about whether and when the Fed will pause, or even cease, its rate cutting.  The next meeting is the 28-29th January; the swaps markets are currently discounting just one cut in the whole of the year, most likely in the mid thereof.

On the other side of the Atlantic the European economy continues to totter, with German bankruptcy filings up by 17% against 2023, with the majority coming in transport, storage, construction and hospitality.

 

Background price action 

Gold, technical;

Source: Bloomberg, StoneX

 

 

Gold in key local currencies; Korean Won +47%

Source: Bloomberg, StoneX

Silver, short-term; failed at $32 and now caught between the 10 and 20-Day moving averages

Source: Bloomberg, StoneX

Gold:silver ratio, January 2024 to-date; Europe, China weighing on silver

Source: Bloomberg, StoneX

CFTC; positive attitude to gold; silver mixed

Gold longs continue to expand and shorts are still covering.  Longs on 10^th December, just as the action was starting in the EFP, were 680t, roughly where they stood at the start of November, while shorts, at 70t, are the lowest since mid-September.  Silver, while also expanding on the long side, is finding extra shorts also.  Longs stood at 7,538t on 10^th December, with shorts at 2,732t, the highest since late July as the markets continue to fret over the economic outlook in Europe and China – and possibly there may be some concerns creeping in about the States in the medium term.

Gold COMEX positioning, Money Managers (t) –

Gold longs closed the year at 567t, 10% over the average for the previous 52 weeks, while the shorts were at their lowest since mid-June, at 50t.  Longs declined over much of December on year-end book-squairing, especially given gold’s outperformance in the sector over the year.

Source: CFTC, StoneX

COMEX Managed Money Silver Positioning (t)

Source: CFTC, StoneX

Silver took a different course from gold with longs and shorts both increasing, but only fractionally (longs up to 6,136t from 5,875t; shorts up from 3,071t to 3,266t).  During December silver longs declined, as they did in gold, but shorts continued to expand as the markets fretted over global growth levels.

ETFs:

Gold  World Gold Council figures record a small loss over the year as a whole, at just 6.8t, although dollar flows were positive at $3.4Bn, taking assets under management to $271Bn.  On a regional basis North America added just eight tonnes, Europe dropped 98t, while Asia added 78t, a gain of 57%.  As we have noted before, at just 115t, Chinese holdings are minimal by comparison with the 1,582t in the States and 1,288t in Europe, there is considerable upside scope.  December saw a net inflow, all of which came from Aisa, with a tiny amount coming out of Europe and almost five tonnes from North America. Thus far January has been mixed, for a net increase of just 1.8t.

Silver added a net 506t over 2024, to reach 22,276t; in early January there have been a couple of days of noticeable redemptions, for a net redemption of 92t.

Global mine production is ~26,000t.1,288t in Europe so the scope for more is apparent.

	14 January 2025	Previous week	% change	Year-to-date	Range Jan 2022 onwards		Range as %
					Min	Max
Gold (pm LBMA price)	2,659.05	2,637.30	0.82%	28.61%	1,628.75	2,777.80	70.55%
Silver (LBMA price)	30.74	31.11	-1.21%	28.36%	22.09	34.51	56.26%
Platinum (pm LBMA price)	927.00	936.00	-0.96%	-6.17%	872.00	1,065.00	22.13%
Palladium (pm LBMA price)	965.00	967.00	-0.21%	-12.35%	852.00	1,222.00	43.43%
S&P 500	6,051.09	6,090.27	-0.64%	26.86%	4,739.21	6,090.27	28.51%
$:€	1.0501	1.0568	-0.63%	-4.93%	1.0418	1.1192	7.43%

Source: Bloomberg, StoneX

Tailwinds for gold exceed the headwinds

For the longer term, the tailwinds substantially outweigh the headwinds and are summarised in this note that we published at the end of August: Precious Metals Talking points 083024: Gold: state of play and key influences going forward

Key points from this note are still relevant, and as follows

Current tailwinds include: -

• Geopolitical risk.

• Increasing trade tensions

• Stresses in the banking systems in the three major regions, notably in the small-to-medium sized sector, and especially exposure to property, and (in the US and to a lesser extent) Commercial Real Estate.

• Emergence of the Shadow Banking sector (i.e. unregulated transactions), reminiscent of the Sub-Prime issues in 2007 that led to the Global Financial Crisis in 2008

• Continued strong Official Sector purchases – not just because they are taking tonnage off the market but because of the signal that it sends to the markets because the Official Sector dislikes uncertainty

• Widespread investor interest, notably from High-Net-Worth individuals, Family offices and other professionals who are back in the market for the long haul.

Headwinds:

• Reduction in international political or trade tensions; Scott Bessant could well be instrumental here

• Any strong inflationary forces and / or associated expectation thereof could force a reversal in monetary policy

• Official sector going on the retreat (unlikely)

• Investors’ conclusion that risks have declined (likely to take a matter of years, compare GFC of 2008); it wasn’t until 2013 that professionals bailed out of gold (over 800t of ETF metal went straight into private hands in China).