Over the past decade, one of the most fascinating observations in the world of precious metals has been the bizarre decoupling in the supply/demand dynamics and thus pricing, between paper and physical gold.
And, as we detailed yesterday, that decoupling has become extreme.
A surge in demand for physical gold - that results in precious metal vendors and exchanges becoming sold out in very short notices - has created shortages in some geographical locations that is stressing gold markets drastically.
Don't take our word for it. Even the venerable Financial Times reports that traders have reported and lamented a growing global shortage of gold bars, as the coronavirus outbreak both disrupts supply and stokes demand, "with one business comparing the frenzied buying of the yellow metal with the consumer rush for toilet roll."
Yesterday, Saxo Bank's head of commodity strategy, Ole Hansen, observed that a lockdown is occurring in two biggest gold hubs in the world, New York and London, so many traders are working from home. "This has caused a breakdown in the marketplace", he said.
“There is no price discovery in the market right now,” he said Tuesday morning.
“If you need to borrow gold in the OTC [over-the-counter] markets right now, you are going to pay a king’s ransom.”
And that 'broken' market is no more evident than in the decoupling between spot and futures markets.
The gap between gold futures on the CME's Comex exchange in New York widened above London spot prices by as much as $80 per ounce - or over 4% - on Tuesday. The two usually remain within a few dollars of one another, and the gap skewed trading in the London market, causing activity to fall as traders feared shutdowns of air travel and precious metal refineries due to the coronavirus outbreak will make it harder to ship bullion from London to the United States to meet contractual requirements.
And so, under pressure from the London Bullion Market Association (LBMA) and several major banks that trade gold, the CME Group has reportedly changed its contract-delivery rules to allow gold bars in London to be used to settle its contracts to ease disruption to trading.
As Reuters reports, London is a key gold storage center, where thousands of tonnes of metal underpin trading, but it uses 400-ounce bars which must be melted down and recast as 100-ounce bars to be accepted by Comex in New York.
The LBMA and executives at major gold-trading banks asked CME to allow 400-ounce bars to be used to settle Comex contracts, said the two sources, both of whom were involved in the discussions.
“It’s totally logical,” said an executive at a gold-trading bank. “In London there’s no shortage of metal.”
Notably, Reuters admits the sources said the CME had not yet made a decision, and any change to its rules would likely take several days to implement and require regulatory approval.
No matter whether they approve it or not, there are serious cracks starting to appear in the paper gold markets as the world reaches for 'money' as The Fed explicitly admits to infinite dollar debasement capabilities.