1/Something structural is happening to the Futures markets in Precious Metals. Both the Comex and Nymex are seeing a collapse in open interest. My premise has been, the introduction of Basel 3, leverage (unallocated) is being moved to exchanges and away from bank’s balance sheet
2/Now we are seeing continued collapse of open interest in the futures market at the same time Wall Street has ramped up their structured products over the last 2 years.
3/With many of these structured products wrapped using futures and options and the issuer is also the price setter, is liquidity about to be constrained for the issuers of these products? Who is really at risk, the investor or the bank?
4/Due to Basel 3, there has been incentive to offer physical metal in allocated or segregated form rather than unallocated. While CTAs and funds press the derivative markets lower, the physical demand has increased in volume globally.
5/Are institutions finally figuring out that to have exposure to precious metals, the safest alternative does not come with a bank guarantee but rather the need to not rely on someone else’s promise to pay.
6/The following charts are price in upper (black) and open interest in lower (purple). These is the continuous monthly chart not a specific contract.
Gold
Gold
7/Silver
8/Platinum
9/Palladium. I leave Palladium last because this is an example of when a market becomes tight and open interest has collapsed, the physical market plays a more dominant role in price discovery.
10/The decline in open interest may be due to deleveraging within the financial markets, however, this may be laying a foundation where demand for physical continues to rise due to concerns of supply rather than inflation expectations.
11/If this becomes reality, the price will reflect the conditions of the market rather than Wall Street’s expectations. Continued decline in open interest may be the beginning of physical commodities’ role in price discovery going forward.
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