Gold faces unique pricing, supply and delivery challenges amid COVID-19 shutdowns

Unusual wide spread between Comex and London Bullion shows up amid COVID-19 Shutdowns

London-COMEX Spread Hit $100 on March 24th

An unusually wide spread between gold prices for Comex futures and the London bullion market this week highlighted both pricing and delivery challenges tied to the shutdowns of gold operations aimed at preventing the spread of the COVID-19 pandemic.

Comex gold futures and London cash spot market prices so far apart on March 24. London spot prices on 24th were as much as $100 an ounce less than the gold futures price on Comex.

The U.K. capital’s professional vaults hold the world’s largest commercial stockpiles of precious metals. This reserve equals to 10 months of global gold-mine output and 15 months of world silver-mine output. But right now, those stockpiles can’t reach other global trading centers so easily. The confusion in the London spot market prompted the big European metals traders to rush to buy Comex gold futures as a hedge. The key reason is that they thought they could not get what they felt were accurate or fair London spot gold prices.

The most-active April gold futures contract GCJ20, -0.66% settled at $1,660.80 an ounce on Comex on March 24,2020. It hit up 6% for the biggest one-day percentage climb in about 11 years according to Dow Jones Market Data.

Some institutions that have been short the April gold futures contract have been asked for physical delivery of that gold. But because of the supply chain issues, it has been difficult to do so and hence the premium went sky high.

Refinement and Delivery Problems Aggravated the Supply-demand Imbalance

The U.S. Mint said that many other mints worldwide have stopped producing bullion. Supply disruptions have been a growing worry as governments around the world shutdown businesses deemed as non-essential. Three of the world’s largest gold refineries have suspended production in Switzerland for at least a week to prevent the spread of coronavirus.

There are logistical issues moving metals around, so supplies of gold cannot satisfy from one area and to another. The hunt for existing gold supplies in the near-term threaten to create significant issues with various markets that cannot connect with one another easily. There’s the possibility of longer supply chain disruptions, which can bring more interests in existing Comex inventories.

The London Bullion Market Association and several major banks that trade gold asked CME Group to allow gold bars in London to be used to settle its contracts. London uses 400-ounce bars, which must be melted down and recast as 100-ounce bars for Comex in New York. Ordinarily this would not be an issue. But unfortunately, the refinery shutdowns have affected the normal market functions.

About E. J. McKay

E.J.McKay is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.