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IPMI and Industry News: Palladium Market News

A Run On Comex Palladium Is Happening Now, And Platinum Could Be Next

Thursday, September 10, 2020   (0 Comments)
Posted by: Matt Watson
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A Run On Comex Palladium Is Happening Now, And Platinum Could Be Next


Sep. 3, 2020 2:21 PM ET


Palladium deliveries for September have hit a record 322, with 245 contracts still open, to either be delivered or cash settled. Total deliveries should therefore be somewhere around 567.

There is enough registered palladium on the Comex to satisfy 745 contracts, meaning about 76% of registered supply is about to be stood for delivery.

Open interest in palladium futures has collapsed to record lows since March, meaning a higher percentage of palladium traders is calling for delivery than ever before in history.

The situation is similar in platinum, which saw a record 4,131 contracts delivered in July. There is enough platinum to satisfy only 4,928 contracts, and 47,369 remain open.

Most of these will roll over, but if more than 4,928 remain open by September 29, shorts will have to bid away remaining eligible platinum to satisfy longs who stand for delivery.

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Nobody knows exactly what a run on physical metal stocks at the Comex would look like, but if you want to see a small preview, then watch the platinum group metals (PGMs) very closely over the remainder of 2020, and in the nearer term over the next two months. By the numbers, it looks like the Comex is going to be cleared of about three quarters of its registered physical palladium stocks by the end of September. As for platinum, the Comex saw a record 4,131 contracts physically delivered in July, the metal's last active contract. The next active contract for October begins deliveries on September 29. At 50oz per platinum contract, there is currently only enough registered platinum available to physically cover 4,928 contracts, while 47,369 contracts in October remain open.

Before we dissect these numbers any further, a quick overview of Comex terminology. There are two kinds of metal stored at the Comex - registered and eligible. The two are the same physically. The only difference is that registered stocks are earmarked with warrants exclusively for delivery against contracts and cannot be used for any other purpose. Eligible metal is stored by its owner for any purpose, but can be moved to registered at any time with a warrant. If, theoretically, the number contracts stood for delivery in any given month exceeds registered stocks, then shorts would have to bid in the open market for the remaining eligible metal available. This is what could cause a price spike.

Registered Palladium Stocks Are Dangerously Low on the Comex

As of the latest report on physical palladium stocks, at 100oz per contract, there is enough registered palladium at the Comex to satisfy 745 contracts. Find the latest stocks reports here. A record 322 contracts have already stood for delivery on the September contract so far, and there are 245 contracts still open. See below, the latest year-to-date delivery report, current to September 2.

Record Palladium Deliveries

This means about 567 contracts are likely to stand for delivery minus a few that may cash settle. If all 567 deliver, this would account for 76% of registered stocks.

On top of registered stocks, there is enough eligible palladium to cover another 493 contracts. There is no guarantee, however, that the owners of these eligible stocks are even interested in tagging them for delivery with warrants in the first place. Eligible palladium stocks could be owned by anyone with any purpose for the palladium in mind, including those who actually want to use the stuff.

What is happening with palladium is particularly strange considering 80% of palladium is used in catalytic converters, and total cars manufactured were down for the second year in a row in 2019 before the COVID-19 pandemic even hit. The last time total car manufacturing figures were down was in 2009. The palladium price took a huge hit when the initial lockdowns took hold, falling by about 50% from late-February to mid-March. Open interest in palladium futures contracts also collapsed to all-time lows, where it still stands at around 9,500 contracts.

Palladium Open Interest

Palladium has since climbed back close to record highs, but open interest has not recovered substantially. Commercials (swaps plus producers) are selling far fewer contracts than they were back at the beginning of the year before the lockdowns, 3,453 versus 11,576 at the beginning of the year. The swaps are actually net long here 1,344.

Palladium COTs


What this suggests is that swaps and producers have mostly exited the palladium futures market. I would guess producers are probably hoarding their stocks and producing less because of the COVID-19 disruptions rather than selling futures. A record 322 deliveries so far this month together with near record low open interest means a higher percentage of palladium futures traders are taking delivery than ever before.

The question is why take delivery if palladium demand should be down as car manufacturing statistics fall off a cliff? My guess is that palladium longs are taking delivery in order to hoard the metal for eventual sale at some point when they believe the global economy will return to normal. If this is the case, then we should continue to see record deliveries for the December contract, now with 9,201 of open interest. It also means we could see the first genuine physical short squeeze in Comex metals where eligible stocks will have to be bid up to satisfy longs if registered stocks are exhausted this December.

This is all the more likely if 75% of existing registered stocks are stood for delivery by the end of this month, which looks very likely. Unlike in gold, bullion banks have no incentive to stop this from happening, because they are net long palladium. Though ironically, perhaps they do have an indirect interest in stopping a palladium squeeze, since if it does happen, it would attract more gold bugs to try to force a squeeze in gold futures.

What About Platinum?

We could see a physical squeeze in platinum beginning September 29. Open interest in platinum also fell sharply from February to March, and it was the sharpest contraction ever, but only to 2012 lows, not all-time lows.

Platinum Futures Open Interest

As I wrote above, the Comex saw a record 4,131 contracts delivered in July. 47,369 contracts remain open for the active October contract, but at 50oz per contract there are only enough registered stocks to cover 4,928. Yes, most of the 47,369 October contracts will roll over, but not all of them. The two trader categories most likely to take platinum delivery are Other and Non Reportables. According to the latest platinum commitment of traders (COT) reports, the Others are long 8,100 contracts, and the Nons are net long 6,482. Together they hold more longs than the managed money category, which doesn't typically take delivery.

Platinum COTs

As you can see above, the bullion banks (COTDLC [S]) are also net long platinum as they are palladium, so they are on the right side of a squeeze and won't be motivated to push the price lower here either.

These are not fundamental reasons to go long the PGMs here, as both are used primarily in catalytic converters and real industrial demand for these metals should be much lower now than before the pandemic began. Still, given the latest Comex numbers, going long platinum betting on October deliveries above 4,928 makes sense for a short-term trade. The most straightforward way to do that is to go long Aberdeen Standard Physical Platinum Shares ETF (NYSEARCA:PPLT). Palladium could also be bought here through the Aberdeen Standard Physical Palladium Shares ETF (NYSEARCA:PALL), though palladium is much more expensive and presents unique risks, especially with car manufacturing and by extension catalytic converter demand down so sharply this year. Platinum, at least, is also a pseudo-monetary metal and is much cheaper.

If we do see a run on registered platinum stocks for the October contract, it should be a nice preview for what could happen in the gold futures market in December, traditionally a big month for physical deliveries anyway.

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