Last week, we discovered precisely which bank got hammered by the violent divergence between the spot and future price of gold. As we reported, "HSBC had 15 "back-testing exceptions" in January and March, when the firm was caught out by moves in the prices of precious metals. Europe’s biggest bank said ... problems were caused in part by “delivery disruptions in the gold market” which means that we now know which bank was on the other side of the gold spot-future trade."
Today we also learned just how much these unexpected moves cost Europe's largest bank: according to Bloomberg, HSBC lost around $200 million in one day in March because of the previously discussed disruptions to the gold market that caused prices to diverge dramatically in key trading hubs.
The one-day loss, which far exceeded the maximum loss anticipated by HSBC’s value-at-risk models, was unusually large for a market in which the leading banks - HSBC and JPMorgan - typically make around $200 million in an entire year. In other words, in one day, HSBC lost an entire year's worth of revenue.
HSBC’s loss highlights the extreme nature of the disruption to the gold market in late March, as lockdowns closed refineries and grounded planes, strangling the supply routes that allow physical gold to move around the globe. As we discussed at the time, the price of gold futures in New York and spot gold in London, which usually trade within a few dollars an ounce of one another, diverged by as much as $70, the most on record.
The divergence hit banks that are active in trading the so-called EFP, or Exchange for Physical, the mechanism by which traders switch positions between the New York and London markets, according to Bloomberg which also notes that HSBC, which last week first revealed it was hit by the gold market disruption, also disclosed the scale of the loss in a chart this week showing its daily trading profits for the first quarter.
The bank described the loss as a "mark-to-market loss mainly associated with gold refining and transportation challenges." It highlighted the "unprecedented widening of the gold exchange-for-physical basis," which "affected HSBC’s gold leasing and financing business and other gold hedging activity leading to mark-to-market losses."
Since late March, the EFP has normalized and the price spread between the spot and futures markets has returned to normal levels of less than $5 an ounce.
Still, HSBC is not the only one struggling with the unusual moves in the gold market. Banks often sell gold futures in New York to hedge their positions in the London market, exposing them to significant losses should the two markets diverge. While it has not been confirmed, some speculate that Canada’s Bank of Nova Scotia, for years one of the leading bullion traders with a business that dates back to the 17th century, shuttered its precious metals unit due to outsized losses following the March gold market turmoil.