by Ronan Manly, BullionStar:
With unprecedented physical gold demand across the world as wider financial markets collapse, coupled with severe precious metals supply shortages and the closure of the world’s major gold refineries, it was only a matter before pricing problems would flare up in the fictitious and flawed paper gold markets of the LBMA in London and the US COMEX, as we warned about here, here and here over the last couple of weeks. And indeed warned about here, exactly 3 years ago this month.
For when you trade limitless synthetic unallocated gold and de facto cash-settled gold futures in a tag team shakedown, as the COMEX futures / London spot OTC brothers continually do in the CME and London Bullion Market Association (LBMA) controlled venues, while providing fictitious price discovery when the physical gold market is on fire, and there is no gold supply to be found, then there is no alternative but that you are going to get burnt.
Tag Team Smackdown
So it is far from surprising to see what we are now seeing in the gold market – the LBMA-COMEX chuckle brothers beginning to get slammed, with one covering for the other as both reach for the ropes.
Those who look at gold prices may have seen the signs first, an unusual divergence that began on Monday (23rd March) between the US dollar spot gold price (XAUUSD) and the price of the most active COMEX gold futures contract (April GC), with the spot price falling noticeably below the futures price, at first by between $5-$7, than by $10, and then as the day wore on by up to $20.
However, this was only the beginning, for in the early hours of Tuesday morning eastern time (New York and Chicago), the spot gold price fell by $30 below the COMEX futures gold price, then by $40 as the London gold market came on-line, then by up to $80 in the London morning as you can see in the chart below (blue line is spot, green and red line with bars is futures). Notice the huge divergence over 23 March and 24 March.
This spot gold price to futures gold price divergence continued to gape strongly all through the Tuesday trading day (24th March) with buy-sell spreads on spot gold also blowing up to at times $100, causing bewilderment among MSM reporters, and market watchers scratching their heads trying to find explanations, with Kitco News claiming that there were:
“unconfirmed reports that London spot gold price quotes have become unreliable or have been pulled as U.K. market-makers shut down due to the Covid-19 outbreak”
But how could any of this be true given that the LBMA was guaranteeing the “continued smooth functioning of the Loco London precious metals market in light of the Coronavirus (COVID-19) outbreak“ with its ‘London Market Business Continuity‘ plan?
Ross Norman of Sharps Pixley in London was more revealing in his choice of words, saying that:
“Evidently the lack of liquidity in the spot market has meant that market-makers are clearly reluctant to take on a trade. With physical supply much diminished, it follows that taking on a position carries significant inherent risk”
But still, LBMA market-makers have a duty and obligation to make a market in gold. It is part of the LBMA rules. The market makers are liquidity providers for gold and they have to provide liquidity. So where were these market makers as the spot price seized up, and why would these market makers not be making a market and providing liquidity for gold?
Efficient Lockdown… of the global gold market?
For the record, the 12 LBMA market making members in question are BNP Paribas, Citibank, Goldman Sachs, HSBC, ICBC Standard, JP Morgan Chase, Merrill Lynch, Morgan Stanley, Standard Chartered, Bank of Nova Scotia, Toronto-Dominion and UBS.
More importantly, amid the confusion, where was the LBMA in all of this? And was there a disturbance in the force between paper gold market (LBMA) and paper gold market (COMEX)? You can bet there was.
With the spot price seized up, enter stage left the LBMA with the strangest of announcements during Tuesday morning, an announcement which was not on the LBMA website, but was circulated to various news outlets such as Kitco. The LBMA statement said:
“The London gold market continues to be open for business. There has, however, been some impact on liquidity arising from price volatility in Comex 100oz 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.”
There are a number of strange things about this statement:
– How can the London gold market be open for business if LBMA market makers are not providing liquidity and not making a market in spot gold while COMEX gold price trades far higher?
– The lack of liquidity appears to be in London. Why is the LBMA deflecting attention from itself and the London market and pinning the blame on the COMEX, with its wording “impact on liquidity arising from price volatility in Comex 100oz futures contracts”?
– Why is the LBMA wanting to facilitate physical delivery in New York when its remit is the London Gold Market that trades gold loco London?
– Why is the LBMA colluding with the COMEX?
– Who are the other key stakeholders that the LBMA and COMEX are colluding with, as they say above?
– What does efficient running of the global gold market mean when it sure as hell doesn“t mean efficient price discovery for physical gold?
– Could it mean an efficient lockdown of the global gold market?