New York faces a gold rush after the pandemic threw precious-metal markets into disarray, setting off a scramble by traders to cut their losses.
Bullion vaults approved by the Comex division of the New York Mercantile Exchange house a record 29.7 million troy ounces, according to FactSet data going back to 2013. Almost three quarters of that gold—weighing as much as nine, fully loaded Boeing 737-700 airplanes—has arrived in the past three months.
The displacement was set off by dysfunction in the market in March and early April, caused by fears of a breakdown in ordinarily frictionless gold supply chains. It has reversed the normal flow of bullion from west to east, redrawing the map of the international gold market.
Conventional gold routes could take months to resume because demand has been crimped in two major buyers of bullion, China and India.
“Gold has reached America from all over the world,” said Allan Finn, commodities director at Malca-Amit, a company that transports gold securely. “The flows into New York are unprecedented.”
Logistics firms such as Malca-Amit are working around the clock to keep up, sometimes opting to charter private planes to transport bullion. Making their job more difficult, few commercial airplanes—the preferred vehicle for moving gold—have been flying in recent months. At the height of the outbreak in New York, planes that did take to the sky often favored carrying medical equipment, rather than bullion, in their holds.
The scramble to get gold to New York stemmed in part from the demand among U.S. investors for the precious metal, seen as a safe store of wealth by many. Gold prices have climbed almost 15% this year, and rose 1.3% Thursday to $1,745.30 a troy ounce.
The influx gained traction after the pandemic made the global gold market seize up in late March.
Investors, banks and miners use New York’s Comex to buy and sell gold futures, while the U.K. is the main venue for purchasing physical bullion. Prices in the two markets are normally within a few dollars per troy ounce of each other. Traders know that banks can fly gold from Europe to New York to deliver against Comex futures if prices were to diverge, bringing them back together.
Restrictions on movement threatened to stop this self-correcting mechanism, driving the premium for New York gold up to $70 an ounce in early April. The widening caused losses at banks that dominate the gold market, typically owning physical bars in the U.K. and hedging them by selling futures on the Comex.
HSBC Holdings PLC booked a roughly $200 million paper loss on a single day in March, largely because logistical problems in the gold market moved prices out of whack. The bank’s gold traders have since recouped most of that money, according to a person familiar with the matter.
To stem the losses, banks almost immediately started to fly hundreds of tons of gold to New York. Having placed bullion in Comex vaults, they were prepared to deliver gold bars against futures they had sold to clients, closing out their short position.
This allowed banks to stop booking mark-to-market losses on trades straddling the U.K. and U.S., said Tai Wong, head of base and precious-metal derivatives trading at BMO Capital Markets.
“It was the only way you could say economically, ‘I’ve closed this position,’” he said.
Further complicating the task of sending gold across the Atlantic during a pandemic, London and New York require different sizes of gold bar. So instead of transporting gold directly to Comex vaults, traders send it through refineries in Switzerland and elsewhere. These recast the bullion into bars weighing 100 ounces or one kilogram each, making them eligible for sale on the exchange.
“The flow of gold from the East to the West has been to levels no one has seen in the past,” said Frederic Panizzutti, managing director of refining and trading company MKS PAMP Group in Dubai.
Banks had an added incentive to ship gold to New York: In doing so, they were betting that the difference between prices in London and New York would narrow. This gave them an opportunity to win some money back, trimming their losses, traders said.
Prices in the two markets have since converged, but the gap remained high by historical standards at $6.15 an ounce Thursday.
In the long run, the disruption could erode New York’s position in the global gold market at the expense of London by making banks cautious of selling futures on the Comex. Trading volumes in over-the-counter gold forward contracts in London have already risen, according to Adrian Ash, director of research at BullionVault.
“That would suggest that the market is longer-term going to say: If I’ve got London and Zurich metal to hedge, I’m going to hedge it in London and Zurich,” Mr. Ash said.
A spokesperson for Comex owner CME Group said its gold futures contract was working as intended, adding that “the increase in our inventory level is showing there is plenty of gold in New York.”
Elsewhere in commodities, the main benchmark for U.S. crude oil prices dropped 3.8% Thursday to $38.09 a barrel after data showed that American crude oil stockpiles increased last week to a record high. Federal Reserve Chairman Jerome Powell’s comments Wednesday warning that the economic recovery may take “some years,” as well as a jump in coronavirus infections in some parts of the U.S., have also dimmed the outlook for a recovery in energy demand.
The post A Scramble for Gold Is Redrawing the Map of the Market appeared first on The Wall Street Journal and is written by Joe Wallace, Anna Isaac
Original source: The Wall Street Journal.