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Another Week, Another New Gold Price High

27 March 2020

Precious Metals Commentary

A good week for gold with the US price staging a recovery back above $1,600 and silver outperforming by putting on a good run up above $14.50.

For Aussie investors, we saw the $A gold price reach a new high of $2,766.95. With our dollar recovering from its previous week lows of 55c to trade near 61c as we write some of the shine was taken off local gold prices and they moderated back to $2,655 and silver just under $24. See the chart below which puts the recent volatile gold prices in perspective – this really has been an extraordinary run.

Gold AUD Chart

Silver’s outperformance resulted in a reduction in the gold:silver ratio from its dramatic spike at 128, which was an all-time high, back down to 110. This could signal a bottom in the silver price as it looked oversold by traders just focusing on the COVID-19 hit to silver’s industrial demand.

Gold/Silver Chart

Investment demand for silver remains very strong based on business we are seeing at ABC Bullion and talking to other dealers worldwide, as well as silver ETFs which have seen an increase of around 3% over the past month. We don’t see any let up in this for the foreseeable future and investors should make up for any reduction in industrial demand, which will return once this virus crisis is over.

What is the Real Price of Gold?

This week the gold market experienced a serious breakdown by providers of an arcane but valuable service to the industry – a service called arbitrage.

The problem was a difference in price between futures contracts traded in New York and the spot price traded in London. This gap was reported to be nearly US$100 per ounce, the highest since 1980 with the April futures contract trading to a high of $1,682 while the spot price was at $1,593.

Such a discrepancy raises the question of which price was the real price of gold – was the New York price artificially high or was the London price too low?

We’d argue that both prices were “real” in that they reflected the reality of their specific local market, which was plenty of metal in London but not enough in New York.

To outside observers, it appears that there is one global price of gold but in fact gold trades at a premium or discount in each local market. By convention that premium or discount is relative to the price of gold in London for a 400oz gold bar.

In normal markets that premium or discount is measured in tens of cents rather than dollars and is thus not visible to retail buyers once trading fees and fabrication fees are included.

The price difference between markets is determined by the cost of moving gold between locations where it there is too much to where there is too little, with that cost calculated based on:
  • Shipment cost – usually in sizeable quantities like 1000kg or A$90 million.
  • Conversion cost – converting the gold into the purity and form the destination market wants.
  • Funding cost – to borrow money to buy the gold and hedge it while it is being shipped until you can sell it.
Buying gold in a market where there is too much and selling it (at a high price) in another market where it is in demand is called arbitrage and is one of the basic trading functions performed by bullion banks and specialist market making trading firms.

Competition between arbitrageurs usually keeps the difference between local markets close to the cost of moving gold around world.

What happened this week was continuing demand in New York meeting a supply constraint resulting from:
  • an already volatile market as evidenced by spreads between buying and selling prices of around A$50 on gold (when normally they are no more than $1).
  • a lockdown occurring in the two biggest gold hubs in the world, New York and London, with traders transitioning to working from home.
  • a supply squeeze with three major Swiss refiners near Italy shutting down due to COVID-19.
  • reduced freight capacity with many flights cancelled and resulting increase in shipment costs as traders compete for limited plane space.

The shutdown of three key Swiss refiners (Valcambi SA, Argor-Heraeus SA and PAMP) was a significant factor as they are a major hub for processing gold and are relied upon to convert London market gold (which is in the form of 400oz bars) into New York Comex market standard of 100oz or kilobars, or vice versa.

A scarcity of Comex specification bars in New York was reported as the underlying cause of the problem as local demand bid up the futures contract without arbitrageurs willing to step in to sell short contracts and simultaneously buy, convert and ship physical from London.

In a move to address the problem, the operator of the Comex gold market – the CME – announced that it will be introducing a new gold futures contract that could be delivered into with 100oz, 400oz and 1kg bars. The price difference has since moderated but is still elevated.

For the foreseeable future there is no doubt that the gold market’s confidence has taken a hit. However, these problems are not unique to the gold industry and are just a reflection in our opinion of trends across many industries where globalised just-in-time supply chains, while efficient in normal times, show their weakness in period of stress as there is no “fat” or buffer stocks in the system.

The Real Price in Australia

In the case of Australia, we are fortunate that as the world’s number two gold producer (possibly overtaking China in 2021) and with 43% of the Australasian gold and silver refining market our own ABC Refinery has more than enough physical metal to meet local demand.

Given that Australia’s precious metal demand is historically quite small compared to Australia’s 326 tonnes of output, the main focus for us is finding international buyers for our gold and silver output. Being close to China and the wider Asian market, a known sink for physical metals, this has never been a problem.

In addition, ABC Refinery’s trading desk has extensive relationships with major international dealers and physical traders in Asia so our gold prices reflect the reality of the physical market in Australia and the region.

Preparing for the Unforeseeable

Many of our clients buy gold and silver because they want insurance for events one can’t get insurance for. We found this note by Jeffrey Christian from independent commodities research firm CPM Group interesting as it seems that the insurance aspects of precious metals aren’t that widely known.

Jeff said that in many discussions with reporters they said that “you can’t prepare for the unforeseeable” and he disagreed, saying that we can assume with 100% certainty that we will experience recessions, financial crises, political disputes, and epidemics as these have all happened in the past.

He says just as prudent people who live in a hurricane, flood plain, earthquake, or tornado area (or in the case of Australia, near bush), prepare by having stock of water, batteries, food and so one, people can prepare for damaging financial events by:
  • Buying and holding gold
  • Diversifying one’s wealth
  • Diversifying where your assets are stored
Given the massive number of orders that we have received in the past few week, many of our clients (new and old) agree with this timeless advice.

Until next time,
John Feeney and Bron Suchecki
ABC Bullion
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at, or call us during trading hours on 1300 361 261.

This article has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this article or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it.

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