Gold rallies, spread balloons as investors charge into bullion

Gold futures surged far above $1 700 an ounce to the highest since 2012, pushing out the spread over spot prices, as investors weighed the widening economic fall-out from the coronavirus pandemic, the prospect of more stimulus, and further signs of dislocation in physical bullion markets.

The precious metal is in demand, with JPMorgan Chase & Co’s Jamie Dimon saying that the disease will lead to a major downturn. Its jump came even as risk assets including equities posted gains on signs the outbreak may be leveling off. Amid the upswing, the gap between gold futures on the Comex and spot prices in London ballooned, echoing a pattern seen last month.

“Gold is flat-out scarce,” Stephen Innes, chief global markets strategist at AxiCorp, said in an email. There’d been “stunning” demand for bullion-backed exchange-traded funds, as well as signs that some banks were covering short positions, Innes said separately in a morning note.

Innes cited a surge in the implied exchange-for-physical figure as an indication of tightness, even though some refineries had started to come back online after suspensions. Exchange-for-physical allows traders to switch futures to and from physical positions, according to CME Group, which owns the Comex.

Futures rallied as much as 2.9% to $1 742.60 an ounce, the highest level since November 2012, and traded at $1 715.40 at 10:20 a.m. in Singapore. Spot gold was 0.2% higher at $1 660.33 an ounce, putting the spread between London and New York prices at more than $50. Earlier, the difference topped $60.

The market experienced a similar divergence about two weeks ago during a historic squeeze in New York futures. At that time, supply channels were strangled as refineries shut down and flights halted, curbing sellers’ capacity to meet commitments to deliver metal. CME Group said it would start a new contract under which 400-ounce bars would also be deliverable, helping ease tightness, and that had it’s first scheduled day of trade on Monday.

Refineries restart

Three major processors in the Swiss canton of Ticino, Europe’s biggest gold-refining hub, are re-opening at a limited rate this week after being shut for almost two weeks. Still, the higher exchange-for-physical could be due to the fact they are only operating at reduced capacity, according to Axicorp’s Innes.

The jump in futures brought them to within 10% of their all-time high set in 2011. Amid expectations that there’ll be more stimulus to offset the hit from the pandemic, global holdings in ETFs have expanded to a record, according to data compiled by Bloomberg.

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

In the US, Congress’s next stimulus bill will be at least another $1 trillion, House Speaker Nancy Pelosi told Democrats on a private conference call. Australian policy makers have a meeting Tuesday, although there is little expectation that the central bank’s governor, Philip Lowe, and the board will make any changes.

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