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Monday, 8th June 2020

The Coronavirus and Gold  

In mid-January, 2020, COMEX open interest (OI) set a new record of nearly 800,000 contracts. Swap dealers as usual supplied the market by going short 205,679 contracts on January 14, also a record. They probably expected to reduce their risk by purchasing physical at spot to but along came COVID-19 and spot physical supply was suddenly not readily available as refiners and shippers abruptly shut down.

The shorts attempted to shake the market to get back on side. OI fell to 650,000 contracts but this did not dent the price. A second push took OI down to 550,000, temporarily dropping the gold price to $1470 on March 19. OI continued to fall, but the gold price did not follow as it usually does, recovering sharply to higher highs in mid-April as speculators themselves had decided to offset the undersupplied spot physical market by the unusual practice of purchasing on COMEX for delivery.

The Swaps have not managed to square their net shorts, which on May 26 were 182,864, only 25,815 less than on January 14. In other words, with open interest down 40%, the Swaps have only reduced their net exposure by 12.4%. Scotia Mocatta was an obvious casualty which we know about because it was owned by a public bank. The pressure continues. This week 45,259 June contracts stood for delivery, amounting to 140.8 tonnes of gold.

American money managers and individuals are apparently using COMEX to take physical delivery and being in a hurry, they were willing to overpay to do so because of the COVID-19 temporary shortage in the physical spot market. Meanwhile, global gold ETFs are setting new records for their physical holdings every week, reaching 3510 tonnes this week, up 1110 tonnes or more than 46% since the start of the year. The squeeze seems to be on.

The gold price took a hit this week as those who bought it against the possibility of a global economic collapse were quick to sell when the amusingly inaccurate US jobs report on Friday seemed to signal that better days were just around the corner. Non-workers on payroll thanks to the Payroll Protection Program were not counted as unemployed. A temporary miscalculation we are sure. But the end of the world was not, in our view, the reason to own gold in the first place. The unprecedented monetary and fiscal stimulus designed to prevent Armegeddon is and the consequences of those efforts lie dead ahead, in our view.