GOLD MARKET DISRUPTED BY LACK OF LIQUIDITY

A lack of liquidity in the international gold market causes remarkable movements in the price of gold. Thus the price of gold in the New York Stock Exchange on Tuesday was about $50 per troy ounce higher than in London. Under normal circumstances the difference is at most a few dollars, but due to lack of arbitrage prices are further apart. Two weeks ago we saw a similar development, when the difference rose to more than $70 per troy ounce.

This peculiar development started when three large smelters in Switzerland had to close their doors temporarily. Because of the corona virus, production was shut down, which meant that part of the global smelting capacity was lost. The London Bullion Market Association (gouden munten) assured the market that there was more than enough smelting capacity, but this did not restore calm to the gold market. An additional problem for the gold market is that there is less air traffic due to the coronavirus. As a result, there is also less capacity to transport precious metals from London to New York.

LACK OF LIQUIDITY

These problems persist despite the introduction of new gold contracts by the CME. With these new contracts traders can also deliver 400 troy ounces of gold bars against gold contracts, in addition to the existing 100 troy ounces and 1 kilo of gold bars. Thanks to this intervention the stock of gold available within the COMEX has increased considerably.

However, it turned out to be not enough to reassure the market. In the last few days the price difference between London and New York has been increasing again, despite the fact that gold stocks should be sufficient. According to the latest figures, total gold stocks on the COMEX now amount to 16 million troy ounces.

The problem traders are now struggling with is a lack of liquidity in the market. Traders do not dare to do large transactions anymore, because the price risk is too high at the moment. As a result, trading volume is decreasing and price differences are increasing.

Last week the average daily trading volume on the COMEX was only 16 million troy ounces, a 75% decrease compared to the end of February. The LBMA also saw the trading volume decrease. In Zurich and London 24 million troy ounces of gold were traded daily last week, half less than at the end of February.