Precious Metals Delivery
CME Group offers a range of precious metals futures contracts that result in physical delivery on maturity. The most significant of these are COMEX gold and silver futures and NYMEX platinum and palladium futures.
Physical delivery helps to ensure that there is a convergence in pricing between the physical market and the futures market at the futures’ expiry. To be able to assess the price of a futures contract with confidence, an investor needs to understand the process for delivery and the nature of the metal that can be delivered.
Precious Metals Brands
Precious metals are minerals, found in rock deposits around the world. These natural deposits are mined and transported to refiners who turn them into a standardized product, typically in the form of a bar or ingot, suitable for use by industry or investors. Each refiner has its own production processes, and imprints its name or logo on the bar. In the industry, the refinery name is referred to as the brand. Other information is also imprinted on the bar, such as a serial number and the weight and purity, or fineness, of the metal.
CME Group only allows certain brands of metal to be delivered against its futures contracts and brands must meet pre-set minimum standards. The exchange also specifies the minimum fineness of the metal in each bar that is acceptable. For example, the minimum fineness of COMEX gold futures is 995, or 995 parts per thousand, i.e. 99.5%. For platinum, the minimum fineness is 99.95%.
To be delivered against a futures contract, a precious metal must be deposited in one of the exchange’s designated depositories. A depository provides secure storage of metal and provides inventory management to the exchange and its members.
To become designated, a depository must meet the requirements of the exchange, including providing the necessary level of security.
Additional Delivery Requirements
The exchange has additional requirements in order for precious metal to be suitable for delivery. Gold and silver bars must be of a certain size: 1,000 ounces for silver, and either 100 ounces or 1 kilogram for gold. Gold refiners must adhere to international standards relating to responsible sourcing. Gold, platinum and palladium must be accompanied by a certification of assay and must be delivered to the depository by an exchange-approved carrier in order to maintain the chain of integrity.
Once metal that meets the exchange’s specifications has been delivered to an exchange-approved depository, the owner of the metal can choose to register the metal with the exchange, a process often referred to as placing the metal on warrant.
A warrant is a legal document of title. At CME Group, warrants are created and stored electronically. The warrant contains all relevant information related to the metal and is created by the depository to be held in the exchange’s systems by the owner’s clearing member firm.
For precious metal’s futures, the warrant is used as the means of delivery.
Futures contracts typically reference a calendar month for assessing a price reference or for effecting delivery. Gold, silver, platinum and palladium delivery can be made on any business day during the contract month.
The Delivery Process
The seller of the futures contract starts the delivery process by providing a formal notice of intention to deliver to the clearinghouse. The seller must identify the warrant they intend to deliver. In turn, the clearinghouse assigns the obligation to take delivery to a holder of a long futures contract.
Delivery occurs by the transfer of ownership of the metal warrant two business days after the seller provides the notice of intent. The transfer takes place at the settlement price set by the exchange on the day the seller provided the notice of intent.
The amount of metal in a bar can vary. While a futures contract is for a standardized amount of metal (e.g. 100 oz. for gold futures), the exact weight of metal is taken into account when the payment amount is calculated.
When futures buyers take delivery of metal warrant, they can choose what to do with it. For example, they can choose to leave it on warrant in the depository, take it off warrant and sell the metal privately or ask for its removal from the depository for use or storage elsewhere, a process known as load out.
The process described above covers gold, silver, platinum and palladium futures contracts at CME Group. Alternative delivery processes are used for other contracts, including delivery via loco London unallocated accounts.
Information about the amount of metal held on warrant at the exchange’s depositories and the volume of deliveries taking place in precious metals contract is available on cmegroup.com.
Peter Knight Advisor