The gold futures market price has been trading between USD 50 – 100 or 3 – 6% above spot since mid-March 2020. It seems the shortage of physical bullion has finally caught up with the futures market.
When a futures contract expires sellers of gold have to deliver gold to buyers. However if there is not enough gold then the sellers will either have to buy back the gold that they sold on the futures market (this is called closing their position), or they have to find other sources of the gold and deliver it to the buyer. The Chicago Mercantile Exchange (CME) has an online training on Futures if you would like to learn more.
Some controversy has broken out lately as market commentators insist the market is broken. This is the reason why the CME has had to make changes to the futures contract specifications to relieve the pressure on the futures market.
Is the market broken? There are two camps. The camps and their arguments are set out below
The YES camp
Market Commentators have speculated for a long time that the gold price has been manipulated to push the price of gold down. This would be in the interest of Central Banks who are the main hoarders of gold. However recent events caused by Covid-19 have resulted in disruptions to bullion refineries and physical bullion shortages. These shortages should have driven the futures gold price up, but they did not… until about 2 weeks ago. This was what we meant when we said two weeks ago that there is a disconnect between the paper and physical gold markets.
Members of the “Yes the market is broken” camp include (click to read more):
Zerohedge – “Panic Stations: What are the LBMA and COMEX trying to hide?”
Zerohedge – “CME change(s) physical gold delivery rules amid market breakdown”
Goldmoney – “Market Report: Broken Markets”
The NO camp
The “No, the markets are not broken” camp comprises the Chicago Mercantile Exchange (CME) /COMEX and London Bullion Market Association (LBMA). The CME operates COMEX which is where the gold futures are traded. The LBMA operates the gold spot market aka the London Gold Price. They have been quick to assure that there is more than enough gold to deliver but have not been able to explain the differences in price between the futures and spot markets.
Explanations put forward by the “No” camp include (click to read more):
Reuters – “Update 1: Comex gold stocks leap as price premium pushes higher” (7 April)
Reuters – “Exclusive: CME pushed to change the gold delivery rules…” (24 March)
Wisdom Tree Panel Discussion with World Gold Council and LBMA
Which camp are you in?
Chart showing Futures trading above Spot
