In 2021, banks are making significant profits from gold as many investors flood into the market that is somehow fractured by the coronavirus crisis. The 50 biggest investment banks globally are on the way to double their income from precious metals. They are expected to earn $2.5 billion and most of it comes from gold, according to Coalition, a banking consultancy.
Coalition research director Amrit Shahani highlighted that $1.2 billion was the earnings pool in 2019. This year to date, that amount has already been surpassed. The excellent rewards that have nor been reported in the past mark an incredible reversal of fortune for bullion banks.
Banks Stepped Into The Gold Market Trading
In March this year, some of these institutions had to wipe hundreds of millions of dollars from their trading accounts as the COVID-19 pandemic hit the supply of gold bars hard. That massive disruption resulted in the current bonanza. After being harassed by huge losses, most of the major banks lowered their trading limits on the Comex exchange CME.O in New York. Comex is the biggest gold futures market.
After the banks lowered their trading limits, a lack of liquidity came up which pushed the prices on Comex above prices in London. London is the main hub for trading physical gold. This divergence created a lucrative opportunity for most of the major banks who have the systems to purchase metal outside of the US and deliver it to New York to profit on the difference.
The pandemic provided an excellent opportunity for such banks to make huge profits. All that happened as investor demand pushed gold prices to record levels above $2,000 an ounce.
Notably, reduced trading by large banks also drove prices of the later-dated futures significantly far above the near-dated ones. It became an ideal opportunity for those with gold to sell it forward for more than enough money to cover the storage and capital costs.
The Comex Exchange Influence
The confluence of events has resulted in the creation of a boom in profits on Comex, according to 13 sources at banks, brokers, and funds. An executive at one of the biggest bullion-trading banks also termed it as ‘free money’.
Even the banks that decided to reduce activity on Comex are now making more money than ever before as explained by industry players who spoke anonymously to the media. Another banker said that ‘it is double the profit on half the position’.
Various hedge funds, banks, and asset managers that did minimal or no business on Comex have now increased their activity. Different sources and data from CME Group that runs the Comex Exchange confirm that activity has increased significantly on the platform.
Comex gold open interest vs gold prices:
CME offers little data that shows the activity of individual actors participating in its market. However, the available numbers show that banks like Morgan Stanley, Goldman Sachs, and Citibank have significantly increased their trade in gold in the vaults registered with the exchange in recent months. They are either accepting bars that they sell forward to investors or delivering metal.
Banks And Lenders Eye The Profits
Lenders like BNP Paribas, Wells Fargo, Barclays, and Royal Bank of Canada have also taken or made deliveries of gold against futures contracts after long periods of little or no activity. As the profits run high, not only from the Comex exchange but also from trading activities, financing, and storing gold outside the futures exchange, some of the banks are hiring.
Deutsche Bank is adding a third person to its recently revived precious metals team. French lender Natixis CNAT.PA, Citi, Bank of America BAC.N, and Australia’s Westpac WBC.AX said through sources and LinkedIn profiles that they have hired in precious metals in 2021.
The banks are yet to comment or respond to requests for comment on this matter. CME’s head of metals, Young-Jin Chang, said:
“We have seen strong growth in our precious metals markets this year, as new and existing customers use our products to manage uncertainty in today’s global economy.”
The Cash And Carry Chance
Before the current health crisis struck, banks like JPMorgan JPM.N and HSBC HSBA.L that mainly dominate gold trading would buy metal in London. They would then hedge their price risk by selling futures on Comex.
This strategy allowed the banks to create liquidity in both places. However, they rested on the assumption that gold could rapidly get shipped to New York when needed. They also assumed that the prices in the two markets would remain relatively close together.
All these assumptions fell apart in March when the virus shut supply channels. The link between New York and London ruptured and prices diverged steeply. As expected, activity fell in both markets.
Gold trading volumes:
Futures prices became unmoored from the London rates. At times trading cheaper but mostly $20 or more an ounce higher, and higher when compared to the Asian countries.
With the supply routes now reopened and the price premium outweighing the cost incurred in making and shipping gold bars; that bankers say ranged between $0.50 and $10 an ounce this year; over 700 tonnes of gold worth $45 billion at the current prices has moved to New York since March, CME data shows.
Before The Pandemic
Before this influx happened, vaults registered with the exchange held less than 300 tonnes. Flows of gold to the US have started to ebb. Nevertheless, another money-making opportunity also opened in a transaction that is known as roll, in which, every several months, investors in futures must swap the expiring contracts for later-dated ones.
Interestingly, it cost about $6 per ounce of gold to swap the February 2021 contract for the April one, according to CME and Refinitiv data. That amount translates to almost $240 million in total for the roughly 400,000 100-ounce contracts trading.
When the London-futures connection broke, banks became reluctant to sell in unlimited quantities. That scenario made the price of gold to rise significantly. Rolling from June to August costs about $15 per ounce on average. The longer, 4-month roll from August to December costs $25 per ounce which translates to about $1 billion in total for 400,000 contracts.
A huge benefit for the seller is that the market is costly for the futures buyers. A source at a large US bank said:
“There is no free lunch. Somebody has to lose money along the way … those people (with long positions) are every time paying money to those willing to take the other side.”
The scope for huge profits has resulted in more sellers coming into the market ranging from smaller banks to hedge funds and asset managers. A further uptick in futures supply may eventually temper profits, especially if it is accompanied by a drop in demand. But for now, banks are coining it by managing their trading books and also facilitating trades executed by new entrants.
One banker said that his desk’s profits from gold were already 200% lat year’s totals. He added:
“The amount of business we’ve done with hedge funds around this is unprecedented. It’s glaringly obvious cash and carry opportunity.”
For now, everyone is trying to make a profit from the volatile gold markets as the second wave of the pandemic threatens to push the global economy back to lockdown.