Can a Physically-Settled Futures Contract Be Closed out before Expiration?

Yes, the vast majority of physically-settled futures contracts are closed out before expiration. Traders close out their positions by taking an opposite and equal trade ▴ a long position is offset by a short trade, and vice versa.

This is known as "offsetting." Only a small percentage of contracts are held until the "first notice day" or "last trading day" for the purpose of actual delivery.