Despite gold settling at a loss, gold scored the biggest weekly rise in more than 11 years from the rebound in demand as minting facilities temporarily closed. This volatility is expected to continue with ups and downs as influenced by liquidity and the coronavirus. What contributes to the highs is the increase in liquidity as global banks’ balance sheets reach global financial crisis levels and beyond. Additionally, social distancing brings the gold price down as they strain US Dollar funding markets. As the social distancing policies stabilize, gold could see an upswing, especially if the US Dollar continues to weaken.
Gold for April on Comex fell about $26 to finish this week at $1625 an ounce. However, prices for the most-active contract increased by 9.5%, which is the biggest weekly rise since September 2008. Other precious metals also saw records. May Silver slipped to an estimated $14 an ounce this week, but it made a weekly climb over 17%, the largest rise since April 1987. April Platinum closed at $740.30 an ounce with a weekly jump of 19%, and June palladium finished at $2,196.80 an ounce for a weekly rise of a whopping 42%.
Gold Futures vs Gold Spot Problem
In an unusual turn of events, the London spot price of gold vs US gold futures had a difference of about $40 on Tuesday. Normally gold futures and gold spot prices trade within a few dollars of each other. Because of the coronavirus, however, the gap between the two widened.
What caused the difference between the gold price and gold futures?
The Federal Reserve announced a $2 Trillion stimulus package on Tuesday to grant loans to companies, expand unemployment benefits, tax rebates, etc. This announcement sent gold prices through the roof yesterday in New York, but London’s spot prices fell behind NY Comex gold futures contracts.
The spot price was around $1600 on March 24th. Meanwhile, gold futures was about $1642, creating a difference of $42. Normally these two prices are within a few dollars. The difference was sparked by multiple factors. One of these factors was investors’ fears that travel restrictions will limit shipments to the US for gold futures contracts. The higher NY price is a reflection of the estimated cost of taking London’s metal to deliver on Comex futures.
How will Gold Futures Contracts Deliver?
The coronavirus has shut down several major metal refineries in Switzerland, one of the top countries to produce precious metals. It has also temporarily closed minting facilities. Both of these factors mean that gold is in short supply. Currently, it is far more difficult to deliver on futures contracts because governments are restricting travel, work, and overseas exchange to combat the spread of the virus.
To deliver on these contracts, bars from London might have to be used. However, the bars from the LMBA to deliver on Comex gold futures will have to be melted down and recast to be valid for delivery. This is because London uses 400 oz bars, while Comex uses 100 oz. But, LMBA announced it could offer support for NY Comex futures because it has affected liquidity in London.
Future for Gold Amid Coronavirus and Stimulus Package
In Europe, Italy remains the epicenter for the coronavirus. There are almost 500,000 cases worldwide. John Hopkins announced over 100,000 people recovered. The United States accounts for 55,000 of the confirmed cases. At this moment, New York has the most cases, which doubles every few days. As the government and the medical system butt heads on how to handle the virus, the government announced a stimulus deal to bail out the economy.
This bailout does not come without pushback. While the stock market rallies in record time, people are concerned this stimulus will not last in the long run. One analyst named Mark Newton, an independent technical analyst, looks to an analytic tool called the Elliot Wave Theory. This theory suggests prices in markets usually move in a pattern of five waves.
Source: Market Watch
This current bounce-back, Newton pointed out in an interview with Market Today, does not occur with the five waves moving up. This bounce-back occurred with the waves moving down, which suggests we could see another drop in the stock market soon.
Stock Market, 2008 Crisis, and Gold Today
In this case, gold is down today as the Dow is resurrected for the time being. In the long run, however, this resurrection is expected to be short-lived. This means gold could potentially rise again. The world is in need of dollars at the moment, so gold has been liquidated for cash to make up for the deficit. But, gold is still in short supply due to the coronavirus, government-mandated shutdowns, and high demand. Goldman Sachs analyzed data from the 2008 crisis to now with gold. They determined there are similar patterns emerging:
“We are beginning to see a similar pattern emerge as gold prices stabilized over the past week and rallied [Monday] as the Fed introduced new liquidity injection facilities with this morning’s announcement.”
Gold is “a currency of last resort” in hedges against economic turmoil due to its value as a precious commodity. Furthermore, as Saudi Arabia and Russia continue to disagree on production cuts, this expands the dollar shortage, leading to Russia potentially becoming a net seller of gold. As lawmakers shock the system, it could be a good time to invest in gold seeing as financial turmoil begets gold price increases. This potentially makes gold more secure than the dollar at this time.
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Disclaimer. This article is not meant to serve as professional economic advice. Any action you take upon the information from this article and website is strictly at your own risk.