Why Gold Futures Are Not In Line With Spot Prices

It appears that even gold markets are not immune to the effects of a global pandemic, and not in the manner that you would think. While many expected the spot price of gold to rise as a result of measures taken by the Fed to bailout firms and print further money, it appears that this might not be the reason afterall, or, conversely, yet.

Rather the recent rise in the price of gold, as per Reuters, is believed to be the actual lack of physical gold bullion. It seems that as a result of current and potential future air travel restrictions, as well as the potential closure of precious metal refiners, traders are fearful that it will impede the ability for contractual requirements from major gold trading banks to be met.

The city of London, as many are likely unaware, is a key storage location for physical gold via the London Bullion Market Association. Gold within London is stored in 400-ounce bars which then underpin trading. Comparatively, the US-based CME Group’s commodities exchange, known as Comex, settles trades in gold via 100-ounce bars.

The result is that major banks that choose to settle futures contracts in physical gold must have their 400-ounce bars melted down and recast into 100-ounce bars to settle contractual obligations. Additionally, those bars are then shipped to US based vaults that deal with the 100-ounce bars.

With the current restrictions on air travel, as well as the potential for further restrictions as well as the potential for the closure of refiners, physical traders run the risk of not being able to meet contractual obligations. Thus the run in gold futures, as well as the disparity seen this morning between the CME Group and the spot price of gold on the London exchange which typically trade within a few dollars of each other.

To settle the current problem, several major bank executives as well as the LBMA have reportedly asked the CME to allow for the temporary settling of transactions in 400-ounce bars. This would enable the London exchange to simply reassign ownership of the gold, and as a result no refining or shipping would be required to take place. As a result, spot prices and futures prices would be able to come together once again if this occurred while reducing some of the current volatility.

Gold last traded at a spot price of $1,617.00 at the time of writing.

Information for this briefing was found via Reuters and TradingView. Not a recommendation to buy or sell any securities. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.