Historic gold squeeze shows signs of easing as investors exit

“Spreads are looking much better today,” Stephen Innes
Image: Carla Gottgens/Bloomberg

Fears over the historic squeeze in the gold market showed signs of easing after some short sellers appeared to exit the market and investors rolled forward contracts.

The bullion market was thrown into turmoil this week as logistical disruptions caused by the coronavirus pandemic led to a divergence of prices in the US and London and curbed supply. At issue was whether there would be enough gold in New York to deliver against futures contracts traded on the Comex.

But open interest in the April contract dropped almost 30% on Wednesday, indicating a small amount of short-covering and as investors rolled positions forward, according to David Govett, head of precious metals trading at Marex Spectron. The decline helped narrow the gap between the volume of gold due to be delivered at expiry and how much sits in Comex warehouses.

Banks and traders typically ship gold around the world on commercial flights, linking the trading hubs of London and New York with vaults and refineries in Switzerland, Hong Kong and Singapore. But as the virus grounds flights and refineries shut down, it’s becoming harder to trade between global markets.

Adding to the squeeze: the larger spot market in London is dominated by 400-ounce bars of gold, but only 100-ounce and kilobars are deliverable on the Comex contract. Late on Tuesday, after New York futures shot to the highest premium to the spot price in four decades, CME Group said it would launch a new futures contract under which 400-ounce bars would also be deliverable, helping ease tightness.

Open interest in April futures on Wednesday was the equivalent of about 10.8 million ounces, down from 19.6 million ounces on Monday. Total deliverable stocks in Comex warehouses were about 8.7 million ounces.

In other signs pressure maybe easing, the premium of Comex futures over spot gold narrowed to about $15 on Thursday, from as high as $67.57 an ounce earlier this week.

“Spreads are looking much better today,” Stephen Innes, chief global market strategist at AxiCorp Ltd., said in a note. “Lower spreads are always welcome in any market, especially in gold, when physical is especially tight with refiners shut down around the world.” Pressure should also ease as the market switches to the June contract as Swiss refineries should be up and running by the time that contract is settled, he said.

Bid-ask spreads in the spot gold market have also come down in a sign that the market tensions are easing, at least for now. Having been in excess of $20 an ounce on Tuesday, bid-ask spreads are now down to around $6 an ounce.

Bullion investors are also weighing plans for massive stimulus worldwide, including unprecedented moves by the Federal Reserve to backstop large swaths of the financial system. Chairman Jerome Powell will make a rare televised interview appearance Thursday. Meanwhile, the U.S. Senate approved a historic $2 trillion rescue plan to respond to the economic and health crisis caused by the pandemic.

Spot gold fell 0.7% to $1,605.69 an ounce at 3:32 p.m. in Singapore, after dropping 0.9% on Wednesday. Prices surged 5.1% on Tuesday, the most in more than a decade. The Bloomberg Dollar Spot Index dropped for a third day after reaching a record on Monday.

Among the other main precious metals, silver declined 1.5% and platinum fell 2.2%. Palladium dropped 3.1% after a 21% jump on Wednesday, the most since 1997, as the prospect of mine shutdowns in South Africa raised concerns of a widening global deficit.

© 2020 Bloomberg

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