{"id":5233,"date":"2020-03-25T09:20:12","date_gmt":"2020-03-25T09:20:12","guid":{"rendered":"https:\/\/www.newmoneyreview.com\/?p=5233"},"modified":"2020-04-06T16:40:26","modified_gmt":"2020-04-06T16:40:26","slug":"gold-market-liquidity-seizes-up","status":"publish","type":"post","link":"https:\/\/newmoneyreview.com\/index.php\/2020\/03\/25\/gold-market-liquidity-seizes-up\/","title":{"rendered":"Gold market liquidity seizes up"},"content":{"rendered":"

A breakdown in the supply chain for deliveries of physical gold is causing a dramatic deterioration in the liquidity of the wholesale gold market.<\/p>\n

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.<\/p>\n

\u201cIt\u2019s an understatement to say that the supply chain has been significantly interrupted,\u201d Norman told New Money Review<\/em>.<\/p>\n

\u201cEvery major refinery is closed,\u201d he said.<\/p>\n

\u201cMetal 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\u2019t actually there.\u201d<\/p>\n

\u201cSo the premium for the physical has jumped to over $80 an ounce, which is unheard of.\u201d<\/p>\n

Exacerbating the problem, the types of bars that can be used for physical delivery in the Comex gold futures contract, the world\u2019s most highly traded gold derivatives contract, are in short supply, said Norman.<\/p>\n

Comex\u2019s gold contracts specify 100-ounce bars, while the so-called Good Delivery bars used in wholesale trading in London are 400 ounces.<\/p>\n

\u201cBig London bars will be flying across to New York pronto to enable those that want to take physical delivery to do so,\u201d said Norman.<\/p>\n

London\u2019s Bullion Market Association (LBMA) has said that it is working with CME, the owner of Comex, to resolve the liquidity issues.<\/p>\n

“The London gold market continues to be open for business,” the LBMA said in a statement issued on March 24.<\/p>\n

“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.”<\/p>\n

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.<\/p>\n

According to Sharps Pixley\u2019s Norman, the supply chain interruption now extends to all forms of physical gold.<\/p>\n

\u201cYou can\u2019t buy coins or bars, there just aren\u2019t any available,\u201d Norman told New Money Review<\/em>.<\/p>\n

\u201cI don\u2019t think normality will return for 4-6 months,\u201d he said.<\/p>\n

According to the Sharps Pixley founder, the supply chain interruptions have had a dramatic effect on the gold market\u2019s overall liquidity.<\/p>\n

\u201cThere\u2019s very little buying and very little selling,\u201d Norman said.<\/p>\n

\u201cIt\u2019s very hard for market makers to know where the market is really at,\u201d he said.<\/p>\n

\u201cIf 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, \u2018I don\u2019t really want to deal\u2019.\u201d<\/p>\n

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.<\/p>\n

However, gold has subsequently recovered most of these losses, trading at $1620 on March 25.<\/p>\n

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.<\/p>\n

\u201cBoth gold and bitcoin have been trashed in recent weeks,\u201d he told New Money Review<\/em><\/a>.<\/p>\n

\u201cBut 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,\u201d he said.<\/p>\n

Don\u2019t miss any more New Money Review content:\u00a0sign up here<\/strong><\/a> for our\u00a0newsletter<\/em><\/p>\n

Click here<\/a> for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

A breakdown in the supply chain for deliveries of physical gold is causing a dramatic deterioration in the liquidity of the wholesale gold market. 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