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Unusual Gold Squeeze Puts Pressure on Safe Haven Metal

Disruptions to gold supply chains cause futures and spot price spread to spike.

Unusual Gold Squeeze Puts Pressure on Safe Haven Metal

Key Takeaways

  • Demand for gold has soared with coronavirus panic.
  • Gold supply chain disruptions have caused a divergence from gold futures prices to spot prices.
  • Could gold's physical properties wreak havoc on the market?

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The coronavirus panic-driven flight to gold has led to unprecedented tests of the physical gold market.

Gold Struggling With Supply and Delivery

The world’s traditional safe haven asset is struggling under the combined weight of coronavirus fears and central bank stimulus packages. While there is no lack of physical gold bars, shipping it around the world has become difficult as air traffic dwindles.

Typically, gold is transported on commercial flights, with quantities limited by the amount of insurance coverage able to be purchased for any single flight. With many airlines grounded amid coronavirus lockdowns and slowing demand, gold’s physical nature means it is currently stranded in vaults.

As Vincent Tie, sales manager at Silver Bullion Pte Ltd in Singapore told Bloomberg:

“Since last week, face masks, hand sanitizers, toilet rolls and bullion have something new in common – they run out when everyone tries to buy them.”

Demand Surge in Wake of COVID-19 Fears

Demand for gold surged over the past week, with prices up 11%.

After initially trading down heavily in correlation with equities and other risk-on assets, the precious metal has seen revived interest this week. Its price patterns have resembled those of Bitcoin, which also fell precipitously before recovering.

Investors typically buy gold futures to avoid the inconvenience of having gold bars physically delivered. But with a slowdown in the deliverability of gold due to air traffic suspensions and vault closures, there is a risk that futures prices may rise excessively over gold prices. 

New York gold futures have witnessed an unprecedented squeeze. If the contracts are held until expiry, physical bullion will need to be delivered to investors. With transport options coming to a halt, the supply chain disruption has investors poised for a situation that has never been experienced before.  

The spread between gold futures in New York and immediately delivered gold in London has spiked. What impact that will produce remains unknown given the unprecedented nature of events.

Most of the world is in uncharted waters and gold has not proven immune to that. Many crypto industry insiders point to cryptocurrency as a potential beneficiary.

Given the digital nature of Bitcoin, Catherine Coley, CEO of Binance.US, sees the situation as a perfect storm for Bitcoin demand:

“Despite the market downturn, Binance.US is seeing unprecedented trading volumes, with especially active trading in Bitcoin. We are also seeing heightened interest in stablecoins as investors recognize the importance of hedging volatility during highly uncertain times. Bitcoin has always been built on the idea of a need to send and receive value in a safe and secure way, and that’s not going anywhere.”

Time will tell if the uncertainty spilling over into metal markets plays into the crypto-as-a-safe-haven narrative.

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