The day's price movements

... and on Tuesday morning the divergence that was barely noticeable late Monday has blown out to unprecedented level, with gold futures decoupling and trading far above spot prices.



The near record spread is the widest seen in four years.

As Kitko notes, just before noon EDT, one price vendor was showing spot metal was trading at $1,612.10 an ounce while at the same time showing the Comex April futures were at $1,654.10 an ounce – a spread of $42 an ounce. It was much wider earlier in the day, when as Kitco adds, "nearby futures were more expensive than deferred, a sign of strong demand in any commodity market."

"I’ve never seen that before," said one gold trader who has been in the market for 30-plus years. Some contacts reached by Kitco suggested the discrepancy is an evolving story that is still unfolding, with traders trying to figure out what’s happening.

Earlier in the day, the London Bullion Market Association, the world's most important authority for physical gold and its transfers, issued this stunning statement to Kitco:

"The London gold market continues to be open for business. There has, however, been some impact on liquidity arising from price volatility in Comex 100-oz [ounce] futures contracts. LBMA has offered its support to CME Group to facilitate physical delivery in New York and is working closely with Comex and other key stakeholders to ensure the efficient running of the global gold market."

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In short, the unprecedented scramble for physical metal coupled with continued liquidations among levered players, while refiners remains offline, appears to be fracturing the gold market from within.
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Meanwhile, Ole Hansen, head of commodity strategy at Saxo Bank, pointed out that a lockdown is occurring in two biggest gold hubs in the world – New York and London – so many traders are working from home. This has caused a breakdown in the marketplace, he said.

“There is no price discovery in the market right now,” he said Tuesday morning. ...

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Increasing pressure from market players and significant liquidity issues in the gold market are prompting CME Group to make some changes in how it delivers its physical gold.

Tuesday evening, the futures exchange announced the launch of a new gold futures contract with expanded delivery options that include 100-troy ounce, 400-troy ounce and 1-kilo gold bars.

The new contract is expected to launch with the first expiration of April 2020, pending regulatory approval, the exchange said.
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According to reports, bullion banks across the board reported massive liquidity issues Tuesday in the physical market. The problem, according to many banks, was the Exchange For Physical (EFP) market, which allows traders to switch gold futures positions to and from physical. Spreads in EFP are typically around $2, but on Tuesday, because of a lack of supply, the spread increased as high as $40.

Part of the issue is the lack of specific gold bars. CME contracts are for 100-ounce bars. However, Good Delivery listed bar from the London Bullion Market Association are 400 ounces.

The move from the CME will help relieve some of the liquidity issues as future contracts could be filled with 400-ounce bars from the London Bullion Market Association.

According to reports, The LBMA and executives at major gold-trading banks asked CME to allow 400-ounce bars to be used to settle Comex contracts.
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... Normally, when bullion banks manufacture waterfall declines in paper gold and silver prices, as they did earlier this month, with the complicity of the CME’s largely unreported rampage in raising initial and maintenance margins on futures contracts many times within a 2-month period in the midst of a stock market crash ...

... I have not seen a single news site in the entire world, except for my own, mention the relentless increase in initial and maintenance margins in gold and silver futures contracts (the 100-oz gold futures contract and the 5000-oz silver futures contract) for the past two months, in a desperate attempt to knock long positions out of the game and thereby prevent an increasing amount of physical delivery requests. Just recently, the CME raised margins yet again for 100-oz gold futures contracts to $9,185/$8,350 for initial/maintenance margins, representing a massive 86% increase in margins, and for 5000-oz silver futures contracts to $9.900/$9,000 for initial/maintenance margins, representing a gigantic 73% increase in margins, in just a couple months’ time. ...

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Futures margin generally represents a smaller percentage of the notional value of the contract, typically 3-12% per futures contract as opposed to up to 50% of the face value of securities purchased on margin.
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The futures-spot price differential points to a perceived higher cost of transporting gold from London to deliver against COMEX futures contracts in the U.S. due to all the COVID-19 disruptions, the strategists explained.

At the time of writing, spot gold was trading at $1,725.50 an ounce, up 0.74% on the day, while June Comex gold futures were at $1,759.70, down 0.10% on the day, after nearing $1,800 earlier in the session.

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PMBug said:

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The report on 3/2/20 noted the maintenance margins for 100oz gold were raised from $5,000 to $5,500. Kim says they are now at $8,350 four weeks later. Sounds like they have been quite busy with this game.

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PMBug said:

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I'm sure the CME will be raising margin requirements soon.

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rblong2us said:

heh

we just (briefly) hit a new ATH in £sterling terms


damn those money printers (-;

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Hedge fund luminaries including Paul Singer, David Einhorn, and Crispin Odey are among those bullish on gold, according to recent letters to investors. So are large asset managers like Blackrock Inc. and Newton Investment Management.

“Gold is the only escape from global monetising,” Odey wrote. Gold futures were the third-largest position held by his flagship Odey European Inc. fund at the end of March. “In the short term, the money will be made on the inflation bet.”

The logic is simple: the massive expansion of central bank balance sheets around the world must eventually dilute the value of their currencies -- most importantly the dollar -- leading to inflation of hard assets like gold. The price of the metal has already risen sharply this year, touching a seven-year high of $1,751.69 an ounce on Friday. But some believe it has much further to go.

“In recent months, gold has gone up in price to some degree, but we think that it is one of the most undervalued investable assets existing today,” Singer’s Elliott Management Corp. wrote in a letter to investors in April. He argued that low interest rates, mine disruptions and “fanatical debasement of money by all of the world’s central banks” would lead gold to rise to “literally multiples of its current price”.
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... silver's Friday rally picked up new momentum after the release of the Federal Reserve's industrial production data for April. The report showed that industrial production dropped 11.2% last month, the most significant drop in the report's century-old history.

One of the report's components showed that mining output, including gold and silver production, dropped 11.2%, the sharpest monthly decline in history.

"Nobody really talks about the mining numbers in this report, but someone was obviously watching it," said Streible. "The data points to tightening physical supply. Silver prices are going higher because the market is getting a lift from all different angles."

With silver prices back over $17 an ounce ounces, Ole Hansen, head of commodity strategy at Saxo Bank, said that the next critical resistance level to watch is $17.50 an ounce.
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The Ultimate Barometer

The Dow-to-Gold ratio is the ultimate barometer of systemic “health.”

It tracks the 30 Dow Jones stocks, as priced in gold. And it tells us the best time to buy gold… and the best time to buy stocks.

You buy stocks when they are cheap relative to gold. That is, when the Dow-to-Gold ratio is below 5 (when it takes five ounces of gold or less to buy the entire Dow).

You sell stocks when they become expensive – when the Dow-to-Gold ratio rises above 15 (when it takes 15 ounces of gold or more to buy the entire Dow). So you sit in gold until stocks become cheap again (in gold terms).

Over the last 120 years, whenever the system “reset,” the ratio went below 5. Stocks were cheap, relative to gold.

On the flip side, when things were ripping – as they were in the late 1990s, for example – the ratio got as high as 41. Stocks were expensive, relative to gold.

And the thing about this barometer is that once it begins a trend, it tends to stay in that trend for many years.

It’s all in this chart of the Dow-to-Gold ratio from 1900 to 2020…

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Gold prices are likely to reach $2,000 an ounce in 12 months on the back of low real interest rates and concerns over currency debasement, even as developed markets emerge from COVID-19 lockdowns, lifting risk-on sentiment, according to a note Friday from Goldman Sachs.

The investment bank raised its 12-month forecast on gold to $2,000 an ounce, from $1,800. It also lifted its three-month view to $1,800 from $1,600 and its six-month forecast to $1,900 from $1,650.
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As central banks pump trillions into the world economy, investors are setting their sights on what could be the next big thing in global monetary policy: yield curve control.

The strategy, which involves using bond purchases to pin down yields on certain maturities to a specific target, was once deemed an extreme and unusual measure, only deployed by the Bank of Japan four years ago after it became clear that a two-decade deflationary spiral wasn’t going away.

No longer. This year, the Reserve Bank of Australia adopted its own version. And despite officials’ attempts to cool it, speculation is rife that the U.S. Federal Reserve and Bank of England will follow later this year.

Should yield curve control go global, it would cement markets’ perception of central banks as the buyers of last resort, boosting risk appetite, lowering volatility and intensifying a broader hunt for yield. While money managers caution that such an environment could fuel reckless investment already stoked by a flood of fiscal and monetary stimulus, they nonetheless see benefits rippling across credit, equities, gold and emerging markets.

“It depends on the form and the price but broadly speaking it’s the green light to carry on with the QE trade -- buy everything regardless of valuation,” said James Athey, who manages $3.1 billion at Aberdeen Standard Investments in London.
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“Looking at open interest in the futures markets, there does not seem to be excessive speculative positioning. This suggests physical buying and exchange traded funds are currently the key factors driving the price, which means a break above $2,000 will likely lead to increased speculative positioning that could push prices even higher,” said Hussein Sayed, chief market strategist at FXTM in a report Monday.

Analysts at Commerzbank also said that gold has plenty of upside when looking at speculative interest.

“The fact that the rise in the gold price has been hardly driven by speculation at all argues against any excessive correction,” the analysts said in a report Monday. “Net long positions held by speculative financial investors increased only slightly in the last reporting week, and still remain significantly short of their early-March level.”
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In the past decade, a traditional 60/40 portfolio of stocks and bonds, as represented by the S&P 500 index and long-term government bonds, was a winner. But with U.S. bond yields moving toward zero or even negative territory, it may be time to rethink that mix. One thought: How about swapping out some bonds for gold?
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