A breakdown in the supply chain for deliveries of physical gold is causing a dramatic deterioration in the liquidity of the wholesale gold market.
According to Ross Norman, a commentator on the precious metals market and founder and former CEO of bullion dealer Sharps Pixley, the bid-offer spread in the wholesale gold market has blown out by more than a hundred-fold in the last few days, increasing from a typical 0.06 percent to over 7 percent in trading on Tuesday March 24.
“It’s an understatement to say that the supply chain has been significantly interrupted,” Norman told New Money Review.
“Every major refinery is closed,” he said.
“Metal is not flowing from the mines to the refineries to the market. When you have a gold futures contract and you have the choice at maturity between rolling the contract or taking delivery of the physical metal, currently if you opt for delivery the metal isn’t actually there.”
“So the premium for the physical has jumped to over $80 an ounce, which is unheard of.”
Exacerbating the problem, the types of bars that can be used for physical delivery in the Comex gold futures contract, the world’s most highly traded gold derivatives contract, are in short supply, said Norman.
Comex’s gold contracts specify 100-ounce bars, while the so-called Good Delivery bars used in wholesale trading in London are 400 ounces.
“Big London bars will be flying across to New York pronto to enable those that want to take physical delivery to do so,” said Norman.
London’s Bullion Market Association (LBMA) has said that it is working with CME, the owner of Comex, to resolve the liquidity issues.
“The London gold market continues to be open for business,” the LBMA said in a statement issued on March 24.
“There has, however, been some impact on liquidity arising from price volatility in Comex 100oz futures contracts. LBMA has offered its support to CME Group to facilitate physical delivery in New York and is working closely with Comex and other key stakeholders to ensure the efficient running of the global gold market.”
Late on March 24, Comex announced the launch of a new gold futures contract with expanded delivery options that include 100-ounce, 400-ounce and 1-kilo gold bars.
According to Sharps Pixley’s Norman, the supply chain interruption now extends to all forms of physical gold.
“You can’t buy coins or bars, there just aren’t any available,” Norman told New Money Review.
“I don’t think normality will return for 4-6 months,” he said.
According to the Sharps Pixley founder, the supply chain interruptions have had a dramatic effect on the gold market’s overall liquidity.
“There’s very little buying and very little selling,” Norman said.
“It’s very hard for market makers to know where the market is really at,” he said.
“If you sell gold, you need to be able to hedge your position in the market. But there are not many counterparties out there to trade with. So the gold bid-offer spread, which is normally super-tight, has blown out to nearly $100. Dealers are saying, ‘I don’t really want to deal’.”
Amidst the coronavirus-induced panic, the dollar price of gold fell by 12 percent, from $1687 to $1486, within the space of seven trading days, starting March 6.
However, gold has subsequently recovered most of these losses, trading at $1620 on March 25.
According to Danny Masters, chairman of digital asset manager CoinShares, the recent massive central bank interventions to combat the economic impact of the coronavirus pandemic will drive future demand for non-inflationary assets.
“Both gold and bitcoin have been trashed in recent weeks,” he told New Money Review.
“But as we come out of this crisis, I think the environment is really positive for both. These are the only two financial instruments that really have limited supply,” he said.
Don’t miss any more New Money Review content: sign up here for our newsletter
Click here for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes
