GOLD AND SILVER FUTURES UNDER STRAIN / MACLEOD FINANCE

Gold and silver futures under strain

Hooray for an interest rate cut and to hell with inflation! But there are some weird happenings in Comex futures, particularly a large short position in the gold contract.

ALASDAIR MACLEOD

In this market report, we draw attention to some interesting developments in Comex’s gold and silver contracts, illustrating the systemic strains emerging in these two markets. 

It is against a background of the Fed abandoning pretence of managing inflation.

But first, we cover this week’s market developments.

This week saw gold and silver back off from recent highs ahead of the Fed’s ¼ point cut in its funds rate. 

Some consolidation was due perhaps, as our headline chart indicates. 

Having tested $3700, gold this morning in Europe was $3657, up a net $14 from last Friday’s close. 

And silver at $42.24 was barely changed on the week after testing the $43 level.

This week’s big event was the Fed’s widely expected cut in its funds rate, signalling that there’s more to come. 

Markets are pricing in a high probability of two further ¼ point reductions by the year end. 

Stephen Miran, who was appointed to the FOMC just in time to vote was the only member pushing for a ½ point reduction, in line with President Trump’s demands.

While market attention has been diverted by declines in interest rates, there are two observations which evidence strains in both gold and silver contracts. 

In both contracts stand-for-deliveries have increased sharply in recent weeks. 

In this third quarter 156 tonnes of gold have been stood for delivery, and 302 tonnes of silver. 

It is silver which is of greater interest: the silver total since 1 January is 10,780 tonnes, which is an extraordinary 56% of global mine output for the first nine months on the Silver Institute’s estimate.

We cannot know for certain who is standing for delivery, but the fact that it involves paying full price indicates that they are either industrial users or investors. 

They are unlikely to withdraw their silver from Comex warehouses until needed, so the accumulating level of warehouse stocks being at a record 527m ounces tells us little. 

This is in the next chart from Datatrack:

Remember, that Comex futures were never intended to be a delivery mechanism. 

Clearly, global supply is so tight that demand whether it be from investor or industrial sources is withdrawing market liquidity at an extraordinary rate. 

Indeed, demand has been fuelled by concerns that imported silver might be subject to US tariffs. 

And the market is exposed to increasing ETF demand as investors climb aboard the silver bandwagon.

Besides stand for deliveries, in the gold contract there is a notable development in the non-reported category, with a large short position suddenly appearing. 

In the three Commitment of Traders reports between 19 August and 9 September, this short position has increased by 28,632 contracts representing 89.05 tonnes. 

This is illustrated in the next chart:

There appear to be two possibilities. 

Either someone has gone out on a limb and has been doubling down on a bad trade, or this is an attempt by an official party, such as the US Exchange Stabilisation Fund or the Bank for International Settlements to put a brake on the market.

Official intervention seems most likely, and one would expect it to be reported in a trader category rarely tracked by market observers. 

It suggests that the authorities are concerned that one or more bullion banks or perhaps a major hedge fund is in trouble and in need of rescue. 

It will be interesting to see what is revealed in tonight’s COT numbers, due to be released after the New York market closes this evening.

The Fed abandons the fight against inflation

So far as gold and silver are concerned, the Fed’s interest rate policy is despite CPI inflation running well above target, and likely to increase further in 2026. 

Under political pressure, the Fed is abandoning an appropriate monetary policy risking a weaker dollar. 

In today’s febrile market conditions, it risks a run on the dollar developing, because it is over-owned by foreigners exposed to currency losses.

No doubt, with treasury funding relying increasingly on short-term T-bills, the reduction in interest costs on new and maturing debt is a solution to funding difficulties — except that it is very inflationary, depending on an expansion of bank credit with little to no participation from savers.

Therefore, while on short-term considerations consolidations in gold and silver are logical, there are signs of enormous strains developing in the relationship between paper markets and underlying physical gold and silver, which can only point to higher prices.

Meanwhile, the technical chart tells us that gold has $4000 firmly in its sights: