From South Africa’s ultra-deep mine shafts to vaults underneath London, from metals traders in New York skyscrapers to main-street sellers of coins. The global gold market is being tested like never before.
Worldwide panic over the coronavirus outbreak and a flood of stimulus by central banks have ignited demand for one of humanity’s oldest methods of storing wealth. But even though there are literally thousands of tonnes of gold bars sitting in vaults around the world, it is suddenly much harder to get the metal when and where it is needed.
“Since last week, face masks, hand sanitisers, toilet rolls and bullion have something new in common – they run out when everyone tries to buy them,” said Mr Vincent Tie, sales manager at Silver Bullion in Singapore, last month.
Much of the world’s gold is stored in vaults in London, Switzerland and New York. The largest single depository is the New York Fed, which holds 497,000 bars stacked high on the Manhattan bedrock. In London, the Bank of England in the City of London holds a further 400,000 bars, while other vaults are operated by banks and logistics companies.
The gold market links these hubs with mines spread around the globe and refineries that buy up gold ore from miners. The refineries also take in scrap bars and jewellery and then produce bars and coins of various sizes – whatever is in highest demand.
Recently, three of the largest refiners, located in the canton of Ticino in Switzerland, were forced to close after the authorities ordered a lockdown.
“This isn’t anything that we’ve seen in a generation because refiners never had to shut down – not in war, not in the great financial crisis, not in natural disasters,” said Mr Tai Wong, the head of metals derivatives trading at BMO Capital Markets. “It’s never happened. And it happened astonishingly rapidly.”
The concerns over supply and the rush on gold purchases have sent futures in New York skyrocketing to the highest premium over spot gold in London in decades, underscoring how desperate investors are to find a safe haven amid the market tumult brought on by the virus.
It is also getting harder to transport gold because it typically flies around the world on ordinary commercial flights, which are being cancelled by the thousands. And while some flights are still moving, there is a limit to how much gold can go on each airplane.
It is not just weight but value – it is not possible to get insurance for more than a certain amount on any one plane. But it is not unheard of for nations to send military planes to ship their gold around the world, complete with armed escorts. In one sign of how things have slowed down, shipping Russian gold overseas can now take about a week instead of a day, said Mr Alexey Zaytsev, head of commodities and funding products at Otkritie Bank.
All these factors have combined to create a historic squeeze on New York gold futures. Typically, investors buy futures to get exposure to gold prices without having to worry about the day-to-day inconveniences of actually owning the metal, while banks use futures to hedge their physical metal exposure. However, if investors hold their futures contract to expiry, they will receive physical metal in a specific form: one 100oz bar or three kilobars.
Ordinarily, if the price of New York gold futures rises too far above gold prices elsewhere in the world, banks simply buy kilobars elsewhere in the world and fly them to New York. But the disruption of global supply chains has thrown that process into doubt.
The result has been a sharp spike in futures prices, making the metal in New York much more expensive than gold for immediate delivery in London. The surging difference – known as a spread – has rattled even veteran traders. Even mines are being disrupted. The industry-wide shutdown in South Africa – unprecedented in its 150-year mining history – is the most dramatic example. Operations are also being stopped or curtailed elsewhere, from Argentina to Canada.
The above-ground stocks of gold mean production disruptions are less important than for industrial metals such as copper. Still, the shutdowns will add to the shock waves rippling through the market.
It is at this point that things get really bad for short-sellers. To make good on maturing contracts, they would have to move actual gold from various locations. If they somehow managed to get a flight, there is another major problem.
Futures contracts in New York are based on 100oz bullion bars.
The gold that is rushed in from abroad is almost always a different size and there are no refiners that are open to help them re-melt the gold and re-pour it into the required bar shape.
Traders in need of physical metal went as far as to cold-call holders of gold bars in the hope that they were in possession of exchange-approved metal.
Some investors paid massive fees to have the remaining operating refineries mint new gold bars, according to people with knowledge of the matter.
Mr Peter Thomas, a senior vice-president at Chicago-based broker Zaner Group, said that a similar dynamic was playing out in other precious metals markets such as silver.
“This hasn’t happened before. We have a situation where there is silver available but no one will deliver it. They won’t load the trucks. They won’t load the planes because of the coronavirus. Even though there is product around, they won’t pick it up.”