Gold Market Dislocates as Physical Supply Hit

Dealers are reporting a dislocation in the spot gold market as the basis risk between futures and physical has blown out over physical delivery concerns. One source reports prices up to 30 big figures wide on some platforms quoting physical while the Comex futures spread remains locked around 30 cents wide.

The problem stems from yesterday’s announcements that three Swiss gold refiners are shutting their doors due to the coronavirus outbreak. With the futures/physical arb a favourite trade in markets, the closure of the Swiss plants means a likely shortage of 100oz Swiss bars – the type accepted by Comex. One way around shortages is traditionally to ship London gold bars, measured at 400oz to Switzerland for them to be smelted into 100oz bars – this can no longer take place thanks to the closure.

At the time of writing, spot futures were trading some $65/oz over physical, leading to the massive blow out in basis. A source on a major bank trading desk says the issue is simply one of delivery, “You can pay the offer on a platform but if there is a shortage of physical gold – and potentially a problem with the delivery mechanism as airlines shut down – how can you be sure the counterparty can deliver? There has been a rush to quality in the market with traders going direct to banks who have physical stocks.”

Another source reports there are problems with the indicative prices being shown on platforms as they do not account for delivery/credit risk, and says most major traders have moved to RFQ (request for quote) only to meet price requests.

One source suggests that a solution to the problem could be at hand, reporting that a call is expected to be made by Comex this afternoon, that it will accept London gold bars. Although as one contact observes, “They still have to get the gold from London to the US”, there is a suggestion that Comex will allow London settlement.

As things stand, however, there is, until such time as Comex decides to accept London gold and dealers there can eradicate it, a massive arbitrage in gold that few, if any, can actually trade. If the settlement issue is solved then it is expected that the larger holders of physical gold will sell it off to bring the arbitrage back to normal levels.

Colin Lambert

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