Yesterday we witnessed a huge bounce in the price of gold by almost 4%. In the last 3 days alone, prices have increased by over 12%. The reason is the increased demand for physical gold. Due to the market crash on the stock exchanges, many funds and traders have had to close their positions in so-called “safe heavens” in order to be able to meet the margin requirements of their other investments. This was also reflected in the price of gold traded on paper, which depreciated by 14.8% from the peak registered in February.
This is resulting in an arbitrage that physical gold buyers, i.e., those who don’t have faith in gold ETFs such as the GDX or simply prefer to have possession of the metal, find especially delightful as it allows them to buy physical gold at lower prices than they would ordinarily have access to.
However, we also noted that whereas in the past such conditions were self-correcting, this time it is not only a record surge in demand for physical gold but also a near shut down in supply as the most productive gold refiners, those located in the southern Swiss town of Ticina, namely Valcambi, Pamp and Argor-Heraeus, now appear to be offline indefinitely.
The London Bullion Market Association (LBMA) has also warned about liquity and physical gold supply problems in the wake of the booming COVID-19 pandemic.
As a result, there is a significant difference in the prices of SPOT and the futures market.
Phil Flynn, senior market analyst with at Price Futures Group, suggested some of the reasons for higher futures prices may be because the market is anticipating future demand as a result of all of the quantitative-easing measures and expectations for fiscal stimulus.
“Futures prices may be a leading indicator of what may be a rush into gold,” Flynn said.
Separately, traders also pointed out that gold futures were in backwardation this morning, with April futures more expensive than the June and December contracts this morning, although that has since reversed with the back months higher again. When nearby are more expensive, the condition is known as backwardation and is the opposite of normal conditions in any commodity market.
During regular times, later months are more expensive due to extra costs such as storage. But when the nearby months are more expensive, this is seen as a sign that traders are paying a premium to get the commodity as soon as possible.
Junior Trader Radi Djuma