CME plans launch of a new gold futures contract with expanded delivery options
An unusually wide spread between gold prices for Comex futures and the London bullion market this week highlighted both pricing and delivery issues tied to the shutdowns of gold operations aimed at preventing the spread of the COVID-19 pandemic.
Metals traders were surprised to see Comex gold futures and London cash spot market prices so far apart on Tuesday. Traders said London spot prices on Tuesday were as much as $100 an ounce less than the gold futures price on Comex.
“London is the heart of global precious metals trading,” said Adrian Ash, director of research at BullionVault. The latest data show that the U.K. capital’s professional vaults hold the world’s largest commercial stockpiles of precious metals, equal to 10 months of global gold-mine output and 15 months of world silver-mine output, according to Ash.
But right now, “those stockpiles can’t reach other global trading centers so easily,” said Ash. “Monday’s UK lockdown announcement sparked Tuesday’s $100 premium for New York settlement and it’s what’s spooking traders in Comex derivatives.”
That contributed to a rally for futures prices on Comex Tuesday. “The confusion in the London spot market prompted the big European metals traders to rush to buy Comex gold futures as a hedge, as they felt they couldn’t get what they felt were accurate or fair London spot gold prices,” said Jim Wyckoff, senior analyst at Kitco.com, in a Wednesday note.
The most-active April gold futures contract US:GCJ20 settled at $1,660.80 an ounce on Comex Tuesday, 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,” said independent metals analyst Ross Norman. The spread between the prices narrowed from $100 on Tuesday to about $30 Wednesday, “suggesting that some will already have taken the pain and paid out that premium to secure the necessary metal.”
The spread between the prices further narrowed to roughly $20 an ounce Thursday, but that is still around three times the typical price gap, according to Ash.
Talk of a shortage of physical gold supplies has been growing, as concerns about the economic impact of COVID-19 have fueled demand for the precious metal, which is often seen as a haven investment.
In a statement Wednesday, the U.S. Mint said it recognizes that “many other mints world-wide have stopped producing bullion.” It said it wants to assure its customers that the Mint “continues to support the bullion market by producing and selling gold and silver bullion coins to our Authorized Purchasers on an allocation model.” The Mint sells its bullion coins to official distributors, not directly to the public.
Supply disruptions have been a growing worry as governments around the world shutdown businesses deemed as nonessential.
Three of the world’s largest gold refineries—Valcambi, Argor-Heraeus and PAMP—have suspended production in Switzerland for at least a week on the back of mandatory closure of nonessential industry in the country to prevent the spread of coronavirus, according to a report from Reuters Monday.
“The problem is there are logistical issues moving metals around, so you cannot satisfy supplies of gold from one area and bring to another,” said Peter Spina, president and chief executive officer at GoldSeek.com.
“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,” he told MarketWatch. There’s the “possibility here of longer supply chain disruptions, which will make the odds grow that more interest in existing Comex inventories will be demanded.”
The London Bullion Market Association and several major banks that trade gold asked CME Group Inc. CME, 0.24% to allow gold bars in London to be used to settle its contracts, Reuters reported Tuesday, citing sources. London uses 400-ounce bars, which must be melted down and recast as 100-ounce bars for Comex in New York, the report said.
‘The problem here is not about a simple shortage of metal—it is all about the right sort, in the right location at the right time.’
And late Tuesday, the CME said it planned to launch a new gold futures contract, pending regulatory approval, that would expand delivery options to include 100-troy ounce, 400-troy ounce and 1-kilo gold bars. The new contract would launch with a first futures contract expiration of April 2020, it said.
The new gold futures contract “will allow for a greater range of delivery products including the 400 oz London gold delivery bars,” said Norman. “The problem here is not about a simple shortage of metal—it is all about the right sort, in the right location at the right time.”
“Ordinarily this would not be an issue but unfortunately the refinery shutdowns have affected normal market functions,” Norman said.