Gold Rallies, Spreads Widen As Investors Exit Market due To Fears

Gold surged as traders added almost 5.7K contracts on April 6. Additionally, volumes increased by about 61.3K contracts according to preliminary figures supplied by CME Group for Gold futures markets.

The gold futures led the latest surge to hit the highest level in over seven years as investors reviewed the widening economic fall-out from COVID-19 and the prospects of more stimulus packages in top economies.

Prices of the ounce troy of gold begun the week on a positive, and the constant move upward remains underpinned by rising open interest and volume. Currently, the 2020 highs at $1,703 appear to be the next target for the precious metal if the purchasing pressure persists.

JPMorgan Chase & Co.’s Jamie Dimon said that the pandemic would result in a significant downturn, although bullion is in demand. The latest jump in gold price came even as the risk assets posted substantial gains on signs that the outbreak could be leveling off soon. Amid this rally, the spread between spot prices and gold futures increased rapidly once more.

Australia & New Zealand Banking Group Ltd. explained in a note:

“Even though hopes are rising of a slowdown in the pandemic, enough doubt exists to see safe-haven assets in strong demand. The tone was set by JP Morgan CEO, Jamie Dimon, who said the outbreak could cause a bad recession.”

The Market

The futures rallied by up to 2.9% to reach $1,742.60 an ounce. That is the highest level since November 2012. It then traded at $1,729.20 at 8:03 a.m. in Singapore. Spot gold was 0.3% higher, reaching $1,665.85 an ounce. It put the spread between London and New York prices at over $60. These two markets used to move in lockstep before the pandemic, but now they have diverged.

To fight the effect of the coronavirus pandemic and lockdowns, central banks and governments have introduced unexpected waves of fiscal and monetary support. In the United States, the next stimulus bill will be at least $1 trillion, according to HouseSpeaker Nancy Pelosi.

Divergence

The telltale signs of dislocation are gradually starting to show up in the gold market once more. An ounce of gold sold on the Comex was approximately $50 more expensive than it was in London on April 7. Typically, the difference is a few dollars.

A similar thing happened around two weeks ago when the traders panicked, thinking that logistical disruptions and flight cancelations would result in a shortage of gold bars in New York. This time around, the reasons are entirely different. There is a lot of bullion available. But, the investors are convinced that there is still too much risk in the markets. Hence, they would instead look from the sidelines.

David Govett, head of precious metals trading at Marex Spectron, said:

“You have a bunch of shell-shocked market makers who are hiding under their desks and do not and possibly can not make markets in any size, shape, or form. Hence we have a lack of liquidity, the small volumes, and the wide spreads.”

Market Indicators

In the past week, the average daily Comex volume was around 16 million ounces representing a 75% drop from the end of February. The volume tracked by the London Bullion Market Association’s LBMA-i service was about 24 million ounces a day last week, which is almost half the late February level.

The cost to swap gold futures to physical products interestingly is still quite high. Thus, it means that the market remains tight, as explained by Stephen Innes, who is the chief global market strategist at AxiCorp Limited. A major thing to watch out for is whether that starts to ease as Swiss refineries start running again.

But, the stockpiles have a lot of supplies. One thing that should make traders calm down is that there is a lot of metal supply ready for delivery against the New York contracts. The cumulative stockpiles on the Comex have increased to a record 16 million ounces. That comprises of bars ranging in sizes eligible for a new contract that was launched earlier in the week.