Under extraordinary conditions, physical gold prices at a disconnect with market prices

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The usually highly liquid gold market hit turbulence last week as transport restrictions prevented contract settlement procedures at New York’s COMEX futures market.

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The Financial Times reported the price of gold futures traded on COMEX and expiring this month widened to a $70-per-ounce premium above the London physical gold market Tuesday. The spread marked the highest on record, prompted by fears the physical 100-ounce gold bars traded on the exchange would not be available as retail demand surged.

Challenging circumstances

London banks frequently used the CME’s COMEX market to hedge their transactions, but London’s 400-ounce bars were not accepted on COMEX, necessitating the melting down and recasting of 400-ounce bars to 100-ounce bars if physical delivery were required.

Under normal circumstances that was not a problem and the two markets traded in close tandem.

But these are not normal times.

A combination of factors — the surge in retail demand for bars, the loss of the majority of daily London-to-New York flights and closure of Europe’s largest gold refineries in the Swiss canton of Ticino, which borders Italy, due to the coronavirus scares — have created a triple whammy distorting the normally super-efficient gold market, the Financial Times reports.

Shortages and delays

In a separate Financial Times article, the paper reports retailers have already reported shortages and delays of up to 15 days on shipments.

Markus Krall, chief executive of German precious metals retailer Degussa, is quoted as saying it was struggling to meet customer appetite for gold bars and coins and had to turn to the wholesale markets. Demand is running at up to five times the normal daily amount.

“We are being creative to find new sources but what is driving it all are the measures by authorities to stop coronavirus. This is so unpredictable,” Krall was quoted as saying.

Likening the shortage to demand for toilet rolls, Rob Halliday-Stein, founder and managing director of BullionByPost (based in Birmingham, U.K.), is quoted as saying the situation was unprecedented.

“Basically we’re selling as soon as we get stock on location in secure vaults — but we’re restricted to what we can get hold of,” Halliday-Stein said.

London’s gold vaults are reportedly full of gold bars, but they are of the 400-ounce variety traded by large banks such as HSBC and JPMorgan, not the smaller bars retail customers buy, which tend to be 1 kilogram (35 ounces) or lighter.

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That is creating a disconnect between physical gold prices and market prices as retailers pay and charge premiums for gold and silver they buy back from investors or they resell.

There is little sign the situation is going to ease up any time soon.

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