GOLD MARKETS FACE TURMOIL AMID CORONAVIRUS SHUTDOWN

Coronavirus Disruptions Cause Unprecedented Chaos in Gold Market

The global pandemic has caused severe disruptions in the gold market, leaving traders worried about securing enough bullion to settle futures contracts in New York. On Tuesday, the price of gold futures on Comex in New York, set to expire this month, soared to a $70-per-ounce premium over the London physical gold market, marking the highest spread on record. Analysts attributed this to strong retail demand for gold coupled with the shutdown of Europe’s largest gold refineries in Switzerland’s Ticino canton, adjacent to Italy, which has been heavily impacted by the virus.

By Wednesday, the premium had decreased to about $22 after CME Group, Comex’s owner, introduced a new futures contract allowing more flexible delivery options. Despite this, analysts noted that the market dislocations remained unusually large for an industry known for its liquidity and trading ease. Typically, the gap between spot and futures markets is only a few dollars.

“Getting physical gold to the right place at the right time is now suddenly a problem,” said Bjarne Schieldrop, chief commodities analyst at SEB, the Nordic bank.

In the past four weeks, an average of $84 billion worth of gold has been traded daily in London among major bullion banks like HSBC and JPMorgan, peaking at over $100 billion in early March, according to the London Bullion Market Association. London banks often use Comex futures to hedge their physical trades, but this relationship broke down due to a shortage of the 100-ounce gold bars required for settling New York futures contracts. Additionally, reduced flights have complicated gold shipments, traders said.

“Normally, the futures market and spot market trade close together,” one trader remarked. “If they go too far apart, you enter into arbitrage with confidence you can physically settle the trade and not lose money. Now, without the ability to move metal around, you don’t have the same confidence.”

In response, CME Group announced a new gold futures contract on Tuesday evening, allowing settlement with 400-ounce or 1-kilogram gold bars, in addition to the standard 100-ounce bars. Previously, 400-ounce gold bars commonly used in London had to be melted and recast as 100-ounce bars for Comex acceptance. Now, they can be sent directly to New York to settle trades.

“This time of unprecedented market conditions has led to growing demand for a broader range of delivery needs for our clients worldwide,” said Derek Sammann, global head of commodity and options products at CME Group.

Gold prices surged to $1,636 per troy ounce on Tuesday, an 8% increase since Monday, as investors sought safety amid fears that monetary-policy interventions to combat the coronavirus, including the US Federal Reserve’s pledge to buy unlimited government bonds, would lead to inflation. By mid-afternoon Wednesday, gold was trading at about $1,600.

Demand for physical gold has “overwhelmed the system,” said Willem Middelkoop, founder of the Commodity Discovery Fund. “This wouldn’t have been a problem if the refiners in Switzerland were in business, but they are out for the first time in over 100 years.”