The demand for precious metals has hit fever pitch amid economic uncertainty and price volatility as millions around the world awaken the gold bug within.
But there’s one big problem: delivery.
Social distancing, business closures, government lockdowns, and grounded airplanes are significantly disrupting gold’s global supply routes. And it has resulted in long shipping delays, low inventories, canceled transactions, lost sales, and higher prices for everyone.
“Gold and silver are selling better than snowballs in August.”
– Local bullion dealer
The U.S. Mint is having its best sales month in years. According to the latest data, the Mint has sold 142,000 ounces in various sizes of American Gold Eagles for the month of March. That’s nearly what it sold throughout the entire year of 2019!
The Mint also sold over 4.8 million one-ounce American Silver Eagles this month, the highest sales for the month of March since 2014.
Bullion retailers couldn’t be happier. Bullion dealers around the world are so busy, many sold out of their most popular gold and silver bullion products.
One local dealer in Baltimore told me:
Gold and silver are selling better than snowballs in August.
But there’s one big catch, dealers are having a hard time getting inventory to sell due to logistics disruptions stemming from the coronavirus pandemic.
The senior vice president at Chicago-based broker Zaner Group, Peter Thomas, was quoted in a Bloomberg article this week saying:
This hasn’t happened before, and this is very unique: 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 the coronavirus. Even though there is product around, they won’t pick it up.
Right now every major national bullion dealer has shipping order delays from three and 15 days. And most have temporarily enacted a purchase minimum of $300, creating headaches and heartaches for both consumers and retailers.
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Transportation issues are affecting the pricing of gold around the world. The difference in gold prices between major hubs New York and London, for example, is usually only a few dollars.
That few dollar difference somewhat stems from the fact the London gold spot market is dominated by 400-ounce gold bars. Meanwhile, the standard on Comex is 100-ounce bars and kilograms, giving them a slight premium over their British counterpart.
Whenever gold bars need to be recast into a different weight, it’s normally not much of an issue. Traders just fly gold on commercial flights between vaults and refineries in New York, London, Hong Kong, and Singapore.
However, the coronavirus pandemic has both ground flights and shut down refineries, leading to the highest premium for 100-ounce New York gold bars in four decades.
On Tuesday, gold futures increased to 7.7% in New York, and at peak commanded a $67.57 per ounce premium over London prices as traders worried they couldn’t move the metal.
The same day, CME Group announced a plan to address the issue. The London Bullion Market Association asked the CME to change its rules, to accept 400-ounce bars in London against its contracts. This would eliminate the need to transport and recast the metal into different weights.
The CME didn’t change its rules but said, it would launch new gold futures that could be settled using 400-ounce, 100-ounce, and one-kilogram gold bars and instruments to link these with its existing contracts.
Derek Sammann, Senior Managing Director and Global Head of Commodity and Options Products for CME Group said in a press release:
This time of unprecedented market conditions has led to growing demand for a broader range of delivery needs for our clients worldwide. By offering a choice of delivery sizes as well as inter-commodity spreads with our benchmark gold futures, this new contract will provide customers with maximum flexibility in managing physical delivery.
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Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.