Where Has All The Gold Gone?

As covered last week, there is currently a shortage in gold due to the recent high demand. While there is a shortage in gold, it is not the traditional kind of shortage. There is still enough gold, but the problem is that due to the travel restrictions, it is very difficult to actually deliver it into New York, where the COMEX futures are delivered.

Of course, investors are currently rushing to gold as a safe haven asset in these extremely volatile times. Historically gold has always been a safe bet as it has been able to retain its value. This was true in the 2008 financial crisis, and it is looking to be true now as well.

Despite a sharp drop in the middle of the month, gold has since rebounded sharply as the US dollar has become weaker again, following an unprecedented rate cut from the US Federal Reserve of 100 basis points, cutting the interest rate to effectively 0%.

As gold does not generate interest either, the key difference between the two assets has become minimised, and gold has only become more attractive again as a result. Therefore, investors are once again putting their bets on gold, causing it to rebound straight back up to $1,650, and currently trading at $1,614/oz.

However, COMEX only accepts one type of gold- the 100 ounce bar. Normally this wouldn’t be a problem, as suppliers would simply ship the British 400 ounce bars to refineries in Asia and Switzerland, and melt them into the COMEX accepted standard before shipping them off to New York. Unfortunately, this is no longer possible either, as affected by the coronavirus pandemic, 3 major Swiss refineries have all shut down. As well as this, flights have been restricted and investors are fearful that their gold could become stuck on these planes.

As a result of this, there is now a 10% premium for physical gold to be delivered. While the trading price for gold is sitting at $1,614, the real price to have actual gold is closer to $1,800/oz. The reason this issue hasn't been reflected in the markets is because most traders simply buy and sell contracts, and not in the actual purchase of gold.

In order to address this issue, CME Group said last Tuesday that it would offer a new contract in which the 400 ounce bars would also be accepted, citing “unprecedented market conditions” as the reason, in order to try mitigate this shortage.

In other news, the black gold, or crude oil, has dropped instead. After reaching an 18-year low, it has rebounded after Presidents Donald Trump and Vladimir Putin reached an agreement to discuss the global oil markets between their top officials. As prices of WTI crude briefly dropped below $20 a barrel, Trump promised to speak with Putin regarding the current price war between Saudi Arabia and Russia.

After the announcement by Saudi Arabia to increase their oil production to 10 million barrels per day, WTI crude immediately dropped below $30 a barrel before consolidating around the $33 mark, but continued to bleed into the 20s as the weeks passed. Fuelled by the coronavirus outbreak, which has stopped planes, trains and automobiles, the demand for oil has dropped, and as a result, so has its price.

While the news that Trump and Putin had spoken caused oil prices to rebound slightly, WTI crude is not out of hot water yet. Global travel restrictions are bound to continue on for several more months, which will undoubtedly affect demand and prices in the months to come.