A decade after the global financial crisis, gold has shone again as the must-have safe haven during the covid-19 pandemic.
On 23 March, the UK finally imposed formal lockdown just as three of the four big Swiss gold refineries suspended operations (many of their staff
commute from northern Italy). Suddenly no gold bars would come out of Switzerland and no cargo could leave Heathrow to reach Comex depositories in and around New York to help settle contracts in the global gold market's largest venue.
But rather than undermining confidence in tradable gold contracts, the pandemic has in fact sent futures contracts to record premiums over spot
bullion, even as it has highlighted the importance of the physical stockpiles underpinning these markets.
Overnight, and with bullion trading in London's over-the-counter market at $1525 per Troy ounce, the April Comex future (then the most active gold contract on the CME's platform) jumped to a $70 premium, an unimaginable gap compared to the $1 or $2 typically needed to convert one into the other, an OTC contract known as "exchange for physical" (EFP).
Did any of those Comex traders actually need any bullion? Like those industry players wanting to hedge their stockpiles against a fall in price,
the speculators who typically take the other side of that trade don't usually want metal to change hands.
On the contrary, if they wanted to take delivery they could simply buy physical gold to start with, along with having to arrange and pay for
storage and insurance rather than seeing the cost of carry hidden in the price of their futures contract.
The result? Gold always moves where it's most highly prized, and while prices in the consumer giants of China and India sank to record discounts against London quotes, those record New York premiums attracted record inflows to Comex depositories. China vanished from HMRC's data for UK gold exports in March and April, and Swiss gold exports switched almost entirely from Asia to the US.
Comex stockpiles have now reached a record 970 tonnes, more than 4 times the level of a year ago, with two-fifths registered by its owners as available for settling Comex gold contracts. Equal to more than 25% of open interest in all current futures, that compares to a low of 0.3% as gold neared the end of its post-global financial crisis bear market in 2015.
Despite glutting New York depositories with gold, the Comex's sudden premium hasn't yet evaporated, with August futures (now the most active contract) currently trading around $10 per ounce above London spot.
In the last fifteen years, the USD gold price in 2007 recorded the highest increase of 30.0% and the average increase during this period is 9.8%.
This is why in times of crisis, we need to diversify our investment portfolio as gold is a natural hedge against USD denominated assets.