by Ronan Manly, BullionStar:
The gaping price differential between spot gold and gold futures that has been plaguing the paper gold markets in London and New York for the last three weeks shows no signs of abating and is continuing to flare up.
In essence, the contango phenomenon we are seeing is one of gold futures prices trading far above spot gold prices, a sign of liquidity problems in the London gold market and a signal that something is completely broken between the world‘s two predominant “gold price discovery” trading venues – which both, by the way, trade paper gold.
As a reminder, London LBMA trades unallocated gold over the counter (OTC), a form of synthetic fractional gold derivative. The vast quantities of unallocated gold which are traded in London are then netted and cleared in an electronic clearing engine called Aurum by 5 LBMA bullion banks that comprices London Precious Metals Clearing Limited (LPMCL), namely JP Morgan, HSBC, UBS, Scotia, and ICBC Standard Bank). Allocation of physical gold is a totally separate process beyond clearing in Aurum.
COMEX trades predominantly cash-settled gold futures contracts on exchange and facilitates the trading of these contracts bilaterally. COMEX futures are 99.9% cash-settled and even those that result in delivery really result in warehouse warrants changing hands but the gold staying in the New York vaults of JP Morgan, HSBC and Scotia.
That the wide-open spread continues to persist is even more remarkable, despite the best efforts of the London Bullion Market Association (LBMA), CME Group (operator of COMEX) and the powerful London-New York bullion bank syndicate to throw all they have at the problem.
At the time of writing, spot gold was trading at US$ 1646 against US$ 1682 for the front-month (most actively traded) COMEX gold futures contract, a $36 spread with futures over 2% over spot. The spread we‘re referring to can be seen in the below 3-day chart, which plots June 2020 gold futures (red and green line) against spot XAUUSD (blue line) from 6 April to 8 April. Notice that over this time the futures price has stayed far above spot, and more importantly, it has persistently done so.
That the spot-futures spread blow out has been running into its third week now can vividly be seen by zooming out for a minute and looking at a similar chart but this time from 23 March until 8 April, the first day that the price spread between London and New York gaped open. Notice the big gaps between futures and spot over 24-25 March, the persistence of the gap over the remainder of the week, and the subsequent re-explosion of the divergence since early April, particularly over the last few days.
Three Weeks and Counting
Its instructive to review a short timeline of some of the events which have contributed to this ongoing saga over the last three weeks, because it shows that no matter what the LBMA and CME do, the spread between London and COMEX continues to stay out there.
23 March – COMEX gold futures (April contract) begin trading noticeably above LBMA bullion bank spot gold prices.
24 March – Spreads between COMEX futures and London spot blew out to $100 at one point during the day, while bid – ask spreads within London spot widened substantially.
24 March – Rumors in the gold market suggested that bullion banks that were required to deliver physical gold for COMEX Exchange for Physical (EFP) transactions failed to do so, suffered losses and exited the market, and that this caused the Spread between COMEX and London to widen substantially.
The bullion bank controlled LBMA releases its first control statement, deflecting attention away from London, saying it will help (essentially collude with) the CME-COMEX in the gold market – The official language is that the LBMA “is working closely with COMEX and other key stakeholders to ensure the efficient running of the global gold market.”
Note – Who are these other key stakeholders, what do they mean by efficient running, and what gives them the right to think they can “run“ the global gold market?
24 March – LBMA and its bullion banks pressure CME to launch a gold futures contract with a deliverable clause in London 400 oz gold bars.
24 March – At end of day, CME announces the launch of a new gold futures contract that can theoretically deliver 400 oz bars, 100 oz bars and kg bars but that uses a fractional paper concept called Accumulated Certificates of Exchange (ACEs) to divide 400 oz deliverable bars into 100 oz bars, and that critically includes all refiner brands on the LBMA Good Delivery List (current and former Good Delivery refiners). This contract will be called 4GC (See here and here).