The Coronavirus And Gold

The comments below are an edited and abridged synopsis of an article by Rudi Fronk and Jim Anthony

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

Coronavirus and Gold | BullionBuzz Weekly eNewsletter
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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, dropping the gold price to $1,470. OI continued to fall, but gold did not follow as it usually does, recovering to higher highs in April as speculators decided to offset the undersupplied physical market by 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. With open interest down 40%, the swaps have only reduced their net exposure by 12.4%. The pressure continues. Last week, 45,259 June contracts stood for delivery, amounting to 140.8 tonnes of gold.

Money managers and individuals are using the COMEX to take physical delivery, and they were willing to overpay to do so because of the Covid-19 shortage in the physical spot market. Meanwhile, global gold ETFs are setting new records for their physical holdings every week, reaching 3,510 tonnes this week, up 1,110 tonnes, or more than 46% since January. The squeeze is on.

The gold price has fallen as those who bought it against the possibility of a global economic collapse were quick to sell when the US jobs report (mistakenly) seemed to signal better days ahead. But the end of the world was not the reason to own gold in the first place. The unprecedented monetary and fiscal stimulus designed to prevent Armageddon is, and the consequences of those efforts lie dead ahead.

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