The supply chain closings caused by the coronavirus have led to unprecedented disruption in the gold market, as traders fear that they will not be able to get enough bullion to settle the futures traded in New York.
The price of gold futures traded on Comex in New York, and expiring this month, widened to a premium of $ 70 per ounce above the London physical gold market on Tuesday. , the highest spread ever recorded.
Analysts said it reflected concerns over strong retail demand for gold combined with the closure of Europe’s largest gold refineries in the Swiss canton of Ticino, which borders Italy, where the virus has killed thousands of people in the worst epidemic in Europe.
The premium fell to around $ 22 on Wednesday after Comex owner CME Group introduced a new futures contract with more flexibility in delivery.
But analysts said the upheavals remain unusually large, for an industry that has long prided itself on its liquidity and ease of trading. The spread between the spot and futures markets is normally a few dollars.
“Getting physical gold in the right place at the right time is now suddenly a problem,” said Bjarne Schieldrop, chief commodity analyst at SEB, the Nordic bank.
In the past four weeks, a daily average of $ 84 billion in gold has been traded in London between major investment banks such as HSBC and JPMorgan in London, with a peak in early March of more than $ 100 billion. , according to the London Bullion Market Association.
London banks often use futures contracts traded on Comex to hedge their physical transactions with their customers, but this relationship was broken due to a shortage of 100-ounce gold bars that are needed to settle the contracts. eventually in New York. A reduction in the number of flights also complicates gold deliveries, according to traders.
“Normally, the futures market and the cash market come together,” said one trader. “If they go too far, you enter arbitration with confidence, you can physically settle the trade and not lose money. Now, without the ability to move metal, you don’t have the same confidence. ”
The glitches prompted the CME Group to announce a new gold futures contract on Tuesday evening which could be settled against the delivery of 400-ounce or 1-kilogram gold bars, in addition to the usual 100-ounce requirement.
So far, the 400 ounce gold bars commonly used in London have had to be melted and remelted into 100 ounce bars to be accepted by Comex. Now they can be sent directly to New York to settle transactions.
“This period of unprecedented market conditions has led to growing demand for a wider range of delivery needs for our customers worldwide,” said Derek Sammann, global manager of commodities and options products at CME Group.
Gold hit $ 1,636 a troy ounce on Tuesday, an 8% increase since the start of trading on Monday as investors sought security amid growing fears that monetary policy interventions to fight coronaviruses – including a commitment from the US Federal Reserve to buy unlimited amounts of government bonds – will lead to inflation. Mid-afternoon Wednesday, it was trading at around $ 1,600.
The demand for physical gold has “overwhelmed the system,” said Willem Middelkoop, founder of the Commodity Discovery Fund. “It wouldn’t have been a problem if the refiners in Switzerland were in operation, but they went out for the first time in over 100 years.”