Physical Gold is looking increasingly hard to find

Marius Paun | London, UK | Senior dealer | Thursday, 26th March 2020

Gold prices dropped sharply in the recent weeks as the coronavirus outbreak took its toll and investors, looking for safety, rushed into the US dollar. However, amid the selloff in the precious metal, there was an interesting phenomenon, the divergence between paper gold (futures contracts) and physical gold. Let’s explain:

It is well known that Switzerland is the country where most of the physical gold is refined. The four main refineries Valcambi, Argor-Heraeus, PAMP, and Metalor, who, between them, the process around 2,000 tonnes annually. Apart from Metalor, the other three are in the south of Ticino canton, just across the Italian border and geographically, very close to the European Covid-19 epicenter. Due to the pandemic, the refineries have all shut down which, at present, is scheduled for a few weeks, but could last longer.

At the same time, many mining companies – Newmont, New Gold, B2 Gold to name a few, have suspended operations. South African gold mining, another hotspot in production has gone into lockdown as well.

So the halting of the production of gold bars and the likes, has stopped their subsequent flow into the financial system, meaning the supply chain has been well and truly broken. As the physical supply of refined gold has dried up bullion dealers began to feel the pinch. On the demand side, panicked investors rushed to buy coins, bars, bullions anything they could get their hands on (while is still cheap?).

The financial website MarketWatch reported that ‘gold buying app Glint saw a 718% spike in volume during the past five weeks as coronavirus volatility drives investors to havens’. Sharps Pixley, the famous London bullion dealer based in Mayfair had this announcement on their website:

It added that buying physical gold now has become close to impossible with physical premiums ‘up roughly a hundred-fold compared to three months ago’. Another dealer, BullionByPost had the following message:

Remember that all of this was happening while gold futures were tanking due to the panic in the markets.

At the beginning of the current week, we saw another oddity. The normal bid-offer spread in gold cash/spot trading (paper trading nevertheless) at brokerage houses is about 30-40 basis points (30-40 cents). All of a sudden there were quotes in excess of $10 spreads. Why?

There were rumors that on Tuesday, at the Comex in New York, where gold futures are traded, some banks had failed to deliver physical gold in exchange for a paper futures contract – thus breaking the contract?! The London Bullion Market Association said it will help New York by shipping out 400-ounce bars. So the shortage among the whole supply chain producers, refiners, dealers and ultimately the COMEX exchange has pushed spreads through the roof.

Eventually, the US Federal Reserve announced unlimited Quantitative Easing and that lifted the world markets. Gold prices were boosted as well. After dropping from a high of $1703.19 reached on 8th March this year to a low of $1451.16 only 8 days later gold prices have rebounded somewhat trading around $1625 at the time of writing.

The market price is now above the moving averages and it looks like the short-term MA is about to cross above the longer-term one. Both have also started to point upwards again.

On the upside the next resistance to overcome is at $1635, followed by $1650. On the downside, look for support at $1595 – $1600 handle. If that does not hold, sellers will test $1580 next which also matches the 50% Fibonacci retracement.