CNN
Hanna Ziady
Investors are snapping up gold bars and coins, seeking the security offered by the precious metal as the coronavirus pandemic trashes economies and forces central banks to print trillions of dollars in new money.
But
with major gold refineries across Europe shut because of
government-ordered lockdowns, online shops out of stock and many of the
passenger planes that move bullion grounded, physical gold is becoming harder to track down.
"There
is gold around, it's just either in the wrong location or in the wrong
form," said Ross Norman, an independent analyst and former senior
bullion dealer at Credit Suisse (CS). "Anyone looking to buy a physical bar or settle a futures contract has an issue."
The
strain on supply, due to a lack of transport and processing capacity,
has been exacerbated by a surge in demand, as investors rush to buy the
safe-haven asset amid the global economic and financial market turmoil.
Rob Halliday-Stein, managing
director of BullionByPost, the United Kingdom's largest online bullion
trader, said sales of gold coins have increased five-fold. "It's
unprecedented," he told CNN Business.
The
company sells everything from Australian gold nugget coins starting at
around £44 ($52) to South African Krugerrands for £1,530 ($1,800) and 1
kilogram gold bars for £48,273 ($56,853).
During
uncertain times there's often a flight to gold, because its physical
properties make it a good store of value, said Jeffrey Currie, global
head of commodities research at Goldman Sachs (GS). "It is dense, cheap to store and much easier to move around than a commodity like oil," Currie explained.
As
central banks print huge amounts of euros, pounds and greenbacks,
collectively known as fiat currencies, to keep their economies afloat,
the intrinsic value of money falls.
"We
like to call [gold] the currency of last resort," added Currie. "When
fear sets in and policymakers debase the fiat currencies like they are
now, the cost of holding gold relative to holding other currencies
declines."
BullionByPost
anticipated the demand spike and secured extra stock in advance. But
Halliday-Stein said investors should be wary of buying gold if it is not
yet in the hands of the seller, noting that "supply chains are
creaking" and it is difficult to predict when more stock will become
available.
To
add to the strain on supply, fewer people are selling gold back to
dealers despite the spike in prices. And those who do want to sell are
finding it difficult because restrictions on travel and work mean
companies such as BullionByPost have pared back their operations, said
Halliday-Stein.
Supply shortages
The crunch isn't just affecting small investors. The international market is at risk of seizing up too.
While
London, the global hub for the physical gold trade, has plenty of 400
ounce bars (worth over $420 billion) inside vaults beneath the city,
getting those bars to New York in the form in which they are traded
there (100 ounce bars) is proving a challenge, with precious metals
refineries closed and thousands of passenger flights canceled.
Gold
traders in the Big Apple are feeling the squeeze. At one point on
Tuesday, the difference between the spot price of gold in London — that
is, the price of gold for immediate delivery — and futures contracts
trading in New York for delivery of gold in April increased to around
$100, said Norman, the independent analyst.
Gold
futures contracts enable buyers and sellers to agree in advance a price
to be paid when the gold is delivered in future. Spot gold in London
and gold futures in New York normally trade within $1 to $2 of one
another, reflecting the costs associated with delivering the gold to New
York.
The widening gap indicates
that the market is unsure of whether it will be possible to actually
deliver the physical gold in April and make good on the contracts. In
other words, it is pricing in a supply shortage.
That prompted CME Group (CME),
which owns COMEX, the exchange on which these contracts are traded, to
announce Tuesday that it would launch a new gold futures contract for
April, which allows for delivery in 100 ounce, 400 ounce and 1 kilogram
gold bars.
"This
new contract will provide customers with maximum flexi
bility in
managing physical delivery," a CME Group spokesperson said, highlighting
"the unprecedented market conditions."
The
London Bullion Market Association, the body that sets standards for how
precious metals are refined and traded around the world, said it has
offered support to CME Group to "facilitate physical delivery in New
York" and is working closely with COMEX "to ensure the efficient running
of the global gold market."
Gold stocks in London vaults are at a "healthy" 8,263 tonnes, the London Bullion Market Association said in a statement.
The
difference between spot and futures prices was around $25 on Thursday,
suggesting that the market is still struggling to function.
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