Corona virus downtimes in the supply chain have led to unprecedented disruptions in the gold market as traders fear that they will not be able to obtain enough gold to settle futures contracts traded in New York.
The price of gold futures traded on Comex in New York and expiring this month rose Tuesday to a premium of $ 70 an ounce above the physical gold market in London, the highest spread ever recorded.
Analysts said this reflected concerns about strong gold retail demand coupled with the closure of Europe’s largest gold refineries in the Swiss canton of Ticino, which borders Italy, where the virus killed thousands of people in Europe’s worst outbreak.
By Wednesday, the premium had dropped to around $ 22 after Comex owner CME Group launched a new futures contract with more flexibility in delivery.
However, analysts said the turmoil has remained unusually large for an industry that has long been proud of its liquidity and ease of trading. The gap between the spot and the futures market is usually a few dollars.
“Having physical gold in the right place at the right time is suddenly a problem,” said Bjarne Schieldrop, chief commodities analyst at SEB, the Nordic bank.
An average of $ 84 billion in gold has been traded daily between major gold bullion banks such as HSBC and JPMorgan in London over the past four weeks, peaking at over $ 100 billion in early March, the London Bullion Market Association said.
London banks often use futures traded on Comex to hedge their physical transactions with customers. However, this relationship broke down due to a lack of 100-ounce gold bars needed to process futures contracts in New York. A reduction in flights also makes gold shipping more difficult, according to traders.
“Usually the futures market and the spot market are close together,” said a trader. “If you go too far apart, you can enter arbitrage with confidence. You can physically trade and not lose money. Without the ability to move metal, you don’t have the same trust. ”
The glitches prompted the CME Group to announce a new gold futures contract on Tuesday evening that could be billed against the delivery of 400-ounce or 1-kilogram gold bars in addition to the usual 100-ounce requirements.
Previously, the 400-ounce gold bars commonly used in London had to be melted down and re-cast as 100-ounce bars to be accepted by Comex. Now they can be sent directly to New York to do business.
“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 director of raw materials and options products at CME Group.
Gold reached $ 1,636 a troy ounce on Tuesday, an 8 percent increase since the start of trading on Monday, as investors feel certain about growing fears that monetary policy interventions to combat the corona virus – including a commitment by the Federal Reserve to buy unlimited amounts searched government bonds – will lead to inflation. It was trading at around $ 1,600 on Wednesday afternoon.
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 refineries in Switzerland were in business, but they have been out for the first time in over 100 years.”