GOLD FACES PRICING CHALLENGES AMID COVID-19 SUPPLY DISRUPTION
CME TO INTRODUCE NEW GOLD FUTURES CONTRACT WITH FLEXIBLE DELIVERY OPTIONS
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Supply Chain Shutdowns Highlight Gold Market Disruptions Amid COVID-19 Pandemic
The gold market is facing unprecedented disruptions due to the coronavirus-induced shutdowns of gold operations. Traders are concerned about the availability of gold bullion needed to settle futures contracts traded on Comex in New York. This week saw a historic spread between Comex gold futures and London bullion market prices, with Tuesday’s gap reaching $100 per ounce—an all-time high.
Pricing and Delivery Issues
The significant difference between New York futures and London spot prices is attributed to a combination of strong retail demand and the closure of Europe’s largest gold refineries in Switzerland’s Ticino region, severely impacted by the virus. By Wednesday, the spread had reduced to about $22, thanks to CME Group introducing a new futures contract with more flexible delivery terms. However, the discrepancy remains unusual for an industry known for its liquidity and ease of trading.
“Getting physical gold to the right place at the right time is now suddenly a problem,” remarked Bjarne Schieldrop, chief commodities analyst at SEB, highlighting the logistical challenges. London’s professional vaults hold the world’s largest commercial stockpiles of precious metals, but these can’t be easily transported to other trading centers due to lockdowns and flight reductions.
Comex Futures Rally
On Tuesday, the most-active April gold futures contract settled at $1,660.80 per ounce on Comex, marking a 6% increase—the largest one-day percentage rise in about 11 years. The confusion in the London spot market led European metals traders to buy Comex gold futures as a hedge, unable to get accurate or fair spot prices in London.
Some institutions shorting the April gold futures contract have struggled to meet physical delivery requirements due to supply chain issues, pushing the premium sky-high. This gap narrowed from $100 on Tuesday to about $30 on Wednesday, indicating that some traders had to pay the premium to secure the necessary metal.
Physical Gold Shortage and Supply Disruptions
Talk of a physical gold shortage is growing as COVID-19 concerns drive demand for the metal, seen as a haven investment. The U.S. Mint assured customers that it continues to support the bullion market by producing and selling gold and silver bullion coins.
Major refineries like Valcambi, Argor-Heraeus, and PAMP in Switzerland have suspended production due to the virus. This has compounded logistical issues in moving metals globally, making it difficult to satisfy gold demand in different regions.
CME Group’s New Gold Futures Contract
To address the disruptions, CME Group plans to launch a new gold futures contract, allowing for delivery options including 100-troy ounces, 400-troy ounces, and 1-kilo gold bars. This move aims to alleviate the supply issues by allowing London’s 400-ounce bars to be used for settling New York contracts.
“The problem here is not about a simple shortage of metal—it is all about the right sort, in the right location at the right time,” explained independent metals analyst Ross Norman. The refinery shutdowns have disrupted normal market functions, highlighting the need for more flexible delivery options in these unprecedented times.