(Bloomberg) -- The gold market is creaking, in the latest sign of how the coronavirus pandemic is causing chaos across financial markets.
Just as demand for the metal soars with investors seeking a safe haven from unprecedented economic turmoil, a glitch has appeared in the global market. The price of gold in New York and London has diverged by the most in four decades after lockdowns and grounded planes strangled the supply routes that allow physical gold to move around the globe.
The strains have rippled through gold trading, with liquidity at some points running thin in a vast market that’s dominated by the world’s biggest banks and watched by millions of mom-and-pop investors.
Banks and traders typically ship gold around the world on commercial flights, linking the trading hubs of London and New York with vaults and refineries in Switzerland, Hong Kong and Singapore. But as the coronavirus grounds flights and refineries shut down, it’s becoming harder to trade between global markets. Silver and other precious metal markets are also being disrupted by the logistics lockdown.
“This isn’t anything that we’ve seen in a generation because refiners never had to shutdown – not in war, not in the great financial crisis, not in natural disasters,” Tai Wong, the head of metals derivatives trading at BMO Capital Markets, said by phone. “It’s never happened. And it happened astonishingly rapidly.”
At issue is whether there will be enough gold in New York to deliver against futures contracts traded on the Comex, which is owned by CME Group Inc. (NASDAQ:CME) While the larger spot market in London is dominated by 400-ounce bars of gold, only 100-ounce and kilobars are deliverable on the Comex contract. CME has taken some steps to try to address the squeeze.
Record Highs
Gold futures on the Comex in New York shot to the highest premium to the London spot price in four decades on Tuesday. By midday on Wednesday, the difference had dropped to around $15 an ounce. The skyrocketing spread between New York and London gold price underscores how desperate investors are to find a safe haven amid the market tumult brought on by the virus.
The last time the New York-London spread was this massive was in 1980 -- when the precious metals markets had been roiled by an oil shock and the Iranian revolution, as well as the Hunt brothers’ attempted corner of the silver market.
Late on Tuesday, CME Group said it would rush the launch of a new gold futures contract under which 400-ounce bars would also be deliverable. The move offers a way to address the squeeze, if holders of Comex futures are willing to exchange for the new contract.
“This new contract will provide customers with maximum flexibility in managing physical delivery,” said Derek Sammann, senior managing director and global head of commodity and options products at CME, citing “unprecedented market conditions.”
As of Tuesday, open interest in the April gold contract stood at 152,603 contracts, equivalent to 15.3 million ounces, but total deliverable stocks in Comex warehouses were just over half that.
Gold futures for June delivery climbed as much as 7.7% in New York on Tuesday and at their peak had a $67.57 an ounce premium over spot prices in London. Based on closing prices going back to the mid-1970s, the biggest spread between a most-active contract and spot gold was $67 in 1980, data compiled by Bloomberg show.
On Wednesday, most-active futures for June delivery were down 2.3% at $1,624.60 an ounce at midday in London.
However, the pressure on the April contract continued, with April trading at a $3.70 premium to June -- an indication of the level of the squeeze. On Tuesday, the April-June spread traded as high as $20 an ounce.
Ordinarily, banks and traders would ship supplies from refineries in Switzerland or Asia, which manufacture 100-ounce and kilobars for their investor clients, to New York in response to such a large Comex premium. But because of the outbreak, some have been reluctant to take advantage of the arbitrage out of fear that flights and truck deliveries will be canceled and trap their supplies, according to one senior trader, who asked not to be identified because the information isn’t public.
Peter Thomas, a senior vice president at Chicago-based broker Zaner Group, said that a similar dynamic was playing out in other precious metals markets such as silver.
“This hasn’t happened before, and this is very unique: We have a situation where there is silver available but no one will deliver it,” he said. “They won’t load the trucks. They won’t load the planes because the coronavirus. Even though there is product around they won’t pick it up.”
©2020 Bloomberg L.P.
