Gold has rarely been a hotter trade, but the world’s two most important markets remain out of sync. In New York, the price of gold on April 9 topped US$1,750 for the first time in seven years. In London, it still has not caught up.
The dislocation first blew out late last month, when disruptions from the COVID-19 pandemic sparked concerns among traders about getting gold to New York in time to settle futures contracts.
In a chaotic couple of days, the premium for New York futures over the London spot price rose above US$70 — the highest in four decades.
The disconnect has remained wide as some of the world’s largest banks, which are also the top gold dealers, have grown wary.
Gold futures settled down 1.9 percent at US$1,698.80 an ounce in New York, falling 2.5 percent for the week.
Even though there is now plenty of time to get metal to New York for June delivery, the wild moves of recent weeks, and the potential for coronavirus-induced logistical headaches, have increased the perceived riskiness of trading the two markets.
“I would guess that the risk managers are not allowing these big positions to be run,” said John Reade, chief market strategist at the World Gold Council. “It’s moved from a concern about availability and transferability of metal to one of risk appetite.”
There has been some progress. Having traded at as much as US$60 in the past two weeks, by Friday morning the spread narrowed to about US$13 an ounce. Yet that still compares with just a few US dollars in normal times.
In theory, it should be relatively easy for any trader spotting such a wide differential between the two largest gold markets to arbitrage it profitably — by buying gold in London then selling it in New York and profiting from the difference.
One problem is size. The London market trades large 400-ounce bars, whereas only 100-ounce bars and kilobars are deliverable in New York.
Nonetheless, gold refiners around the world produce kilobars, which are the type of gold that is typically used to settle Comex futures and is popular with investors. This means it is usually straightforward to get hold of them and deliver to New York.
The pandemic has made that process more difficult. Gold typically flies around the world on passenger planes, and a vast number of flights have been canceled due to the pandemic. Even though Switzerland’s gold refineries have restarted since early this month, the temporary shutdown made it harder to get hold of certain products.
“Everyone wants to get gold into the same airplane. There’s almost a fight,” said Drazen Repak, head of trading banknotes and precious metals at Zurcher Kantonalbank.
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