Gold spreads widened amid soaring futures prices

Gold coronavirus gold(L-R) Silver medalist Jason Brown of the United States, gold medalist Nathan Chen of the United States and bronze medalist Dmitri Aliev of Russia pose together after winning the men's competition in the ISU Grand Prix of Figure Skating Skate America at the Orleans Arena Saturday, Oct. 19, 2019, in Las Vegas. (David Becker/Las Vegas News Bureau) - With permission from TheNewsMarket.com

Gold spreads have opened up as the price soared to a fresh seven-year high on Tuesday.  The gold price was up 6% in its largest one-day increase in 11 years. The Federal Reserve’s commitment to unlimited asset purchases effectively destroys the U.S. dollar, which is good for gold.

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Gold price is soaring

The gold price also climbed as three of the biggest gold refineries in the world announced that they've suspended production. Switzerland ordered the closure of non-essential businesses, and that includes gold refineries. Thus, Argor-Heraeus, PAMP and Valcambi have halted production for at least a week, according to Reuters. The three refineries produce about one-third of the world's gold each year.

The gold price increased by the most in dollar terms in a single day going back to November 1984, according to MarketWatch, which cited Dow Jones Market Data. Today's percentage gain was the biggest since March 2009.

Gold spreads widen

Kitco News reports that gold spreads have opened up as pricing for futures contracts skyrockets much higher than spot prices. Around midday, spot prices for gold was around $1,612 an ounce. Meanwhile, Comex April futures were trading at around $1,654 an ounce. That gold spread was actually decreased from where it was before.

One gold trader who has been in the market for more than 30 years said he has never seen such wide gold spreads before. Some contracts suggest the discrepancy in gold spreads is still unfolding, and traders are a bit confused.

The London Bullion Market told Kitco News in a statement that price volatility in Comex 100-ounce futures contracts has impacted liquidity. The firm offered support to CME Group to support delivery of physical gold in New York and is working with Comex and other stakeholders to ensure that the world's gold market continues to run efficiently.

Gold hubs on lockdown, boosting gold spreads

Saxo Bank analyst Ole Hansen noted that New York and London, which are two of the world's biggest hubs for gold trading, are on lockdown. Many traders are now working from home, which he believes has caused a market breakdown. He said there's no price discovery going on at the moment, so traders who need to borrow gold in the over-the-counter markets "are going to pay a king's ransom."

Ole told Kitco News on Tuesday that the issue is logistics because the coronavirus has broken supply chains around the world. He also said the physical gold market has dried up because there is no access to the metal. He added that while there is plenty of gold available, it's "not in the right places."

"Nobody can deliver the gold because we are forced to stay home," he explained.

Price Futures Group analyst Phil Flynn told Kitco that the high futures prices which have contributed to the widened gold spreads could be a "leading indicator of what may be a rush into gold."

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About the Author

Michelle Jones
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at Mjones@valuewalk.com.

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