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Precious Metals Markets Face Logistical Challenges

The gold and silver market could face logistical challenges as part of the fallout from the coronavirus crisis.  Mints, such as the Royal Canadian Mint, have made headlines as they’ve closed. Some have speculated that mine and mint closures due to efforts to slow the spread of COVID-19 could create supply shortages.

Amid the panic, traders who have shorted the gold price on the futures market have lost their ability to easily exit the trade due to, in Bloomberg’s words, “the global economic collapse.” New York-based futures contracts are based on 100-ounce bullion bars. Procuring specifically 100 oz gold bars could be a challenge, according to reports.

“To make good on maturing contracts, [traders short on gold] would have to move actual gold from various locations. But with the virus shutting down air travel across the globe, procuring a flight to transport the metal became nearly impossible,” writes Bloomberg. 

The short-seller would need to pay a refiner to re-melt the gold and re-pour it into the required bar shape, in order for it to be delivered to the contract buyer. Refiners across the globe, such as three of the world’s largest out of Switzerland, have closed their doors for the time being. 

The price of swapping a gold contract has increased amid the coronavirus crisis, too. With economic distress increased starting Friday, March 20, as the cost to swap New York futures and spot physical gold in London increased $2. Before the crisis, this trade cost nearly zilch. After the close of the next session on Monday, the premium increased to $6.75.

In Asia on Tuesday morning, there weren’t many sellers. Buyers scrambled for whatever gold they could. Once London opened, therefore, they had trouble buying. 

“I realized it was going to be an extremely volatile day,” Tai Wong, the head of metals derivatives trading at BMO Capital Markets in New York, said of Tuesday. “We watched this panic develop literally over the course of 12 hours. Having seen enough market dislocations, you recognize that the frenzy wasn’t likely to last, but at the same time you also don’t know how long it would extend.”

Although things calmed Tuesday night, investors and decades-old veterans had been shaken. Losses were estimated at potentially $1 billion, though investors involved in short trades represent less than 4% of the total open interest; that is, the amount of outstanding contracts.

While some traders cold-called gold bar holders looking for exchange-approved gold metal, others paid massive fees to remaining operating refiners to mint new gold bars.

The spread on gold futures contracts swung wildly. On April and June futures contracts, the spread increased $20 an ounce. It costs, therefore, much more to buy metal for April than for two months later. That signals more near-term demand for bullion and the need to soon have physical supply. By week’s end, however, the June contract cost nearly $30 more than the April contract. Traders immediate appetite for physical gold had decreased.

“People want their gold now, because they realized that the fiat money world is collapsing and then they go to get their gold and these exchanges with Comex or LBMA are saying ‘no we don’t have the gold actually, we lent it out, it’s not here,’” analyst Max Keiser said.

He added: “Everyone wants to repatriate, they want their gold back… So the physical price of gold is now zooming higher and the paper price soon will become a meaningless price.”