Last night, when observing the unprecedented "gold run" on precious metals dealers which has left all gold vendors with little to no physical gold, I knew that "the price of physical gold has decoupled from paper gold" as a result of paper gold liquidations as leveraged funds scramble to cover margin calls using safe assets resulting in an arbitrage that physical gold buyers, i.e., those who don't have faith in gold ETFs such as the GDX or simply prefer to have possession of the metal, find especially delightful as it allows them to buy physical gold at lower prices than they would ordinarily have access to.
However whereas in the past such conditions were self-correcting, this time it is not only a record surge in demand for physical gold but also a near shut down in supply as the most productive gold refiners, those located in the southern Swiss town of Ticina, namely Valcambi, Pamp and Argor-Heraeus, now appear to be offline indefinitely.
"I’ve never seen that before," said one gold trader who has been in the market for 30-plus years.
Saxo Bank's head of commodity strategy, Ole Hansen, observed 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. “If you need to borrow gold in the OTC [over-the-counter] markets right now, you are going to pay a king’s ransom.”
Picking up on what was said last night, Hansen described the problem as a logistics issue as the coronavirus has decimated supply chains across the world, adding that the gold market has dried up because nobody has access to physical metal.
“We don’t have enough hands to handle all the demand,” he said. “There is plenty of gold in the market, but it’s not in the right places. Nobody can deliver the gold because we are forced to stay home.”
