HISTORIC GOLD SQUEEZE LOOMS AS CORONAVIRUS DISRUPTS SUPPLY CHAINS

By JACK FARCHY AND JUSTINA VASQUEZ | BLOOMBERG MARCH 24, 2020 | 4:36 PM

The gold market in New York is experiencing an unprecedented squeeze as the global pandemic disrupts physical trading routes while investors flock to gold as a haven.

The primary concern is whether sufficient gold will be available in New York to fulfill futures contracts traded on the Comex, especially with metals refiners shutting down and travel restrictions halting flights. On Monday, the April gold contract had an open interest of 195,604 contracts, equivalent to 19.6 million ounces, while total deliverable stocks in Comex warehouses stood at 8.7 million ounces.

“This is unprecedented. Refiners have never shut down before—not during the war, the financial crisis, or natural disasters,” said Tai Wong, head of metals derivatives trading at BMO Capital Markets, on Tuesday. “This situation emerged astonishingly quickly.”

Supply concerns and a surge in gold purchases have driven New York futures to the highest premium over spot gold in London in decades, highlighting investors’ desperation for a haven amidst the market chaos caused by the virus. The last time the New York-London spread was this wide was in the 1980s when the Hunt brothers attempted to corner the silver market, sending gold futures to a high of $850 an ounce—a record held for 25 years.

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“We’re facing a situation where silver is available, but no one will deliver it. Trucks and planes aren’t being loaded due to the coronavirus. Even though the product is there, it remains uncollected.

PETER THOMAS, ZANER GROUP

June gold futures surged up to 7.7%, reaching $1,693.50 per ounce in New York. At its peak on Tuesday, the futures had a $67.57 premium over spot prices in London. Historically, the largest spread between a most-active contract and spot gold was $67 in 1980, according to Bloomberg data.

On Tuesday, a London trade group representing gold market participants announced it is collaborating with Comex and others to “facilitate physical delivery in New York” and maintain the global gold market’s efficiency. The London Bullion Market Association (LBMA) acknowledged that the volatility in Comex futures has impacted liquidity.

Comex has not yet responded to requests for comment.

Highlighting the tightness in gold futures, the April contract traded over $20 an ounce higher than the most-active June futures on Tuesday.

The pandemic has disrupted the global precious metals supply chain. European metals refiners are shutting down. Banks and traders would typically transport supplies to New York to capitalize on the substantial Comex premium over the London spot market. However, due to the outbreak, many are hesitant to exploit this arbitrage, fearing that flights and truck deliveries might be canceled, stranding their supplies. A senior trader, who preferred to remain anonymous, shared this concern.

Complicating matters, only specific types of gold bars meet the specifications for delivery on Comex contracts.

Peter Thomas, senior vice president at Chicago-based broker Zaner Group, noted similar issues in other precious metals markets like silver.

“This is unprecedented and unique: There is silver available, but no one is delivering it,” he explained. “Trucks and planes aren’t being loaded due to the coronavirus. Even though the product is available, it remains undelivered.”

Switzerland’s refining industry, a key hub for processing gold into bars and coins, has largely shut down due to the virus. Additionally, the global grounding of flights has left major dealers uncertain about their ability to transport bullion internationally as usual.