Gold Surging as Refiners Have Trouble Meeting Physical Demand

Gold futures (GC) are screaming higher this morning as demand is surging. The Exchange for Physical (EFP) market is having difficulties meeting the demand for gold for their clients, and therefore spreads between the futures market and the physical markets are blowing out.

According to Investopedia, an EFP is a private agreement between two parties to trade a futures position for the basket of underlying actuals, which in this case is gold. Consider a case where gold refiners are shutting down, producing less. In addition, they can’t move their products because of the shutdowns. As a result, people who want to participate in the EFP market are dealing with much wider spreads between the futures contract price and the physical gold price. In addition, market-makers who had gone short gold EFP positions are failing. The net result is higher gold spot prices, higher gold futures prices, and higher gold spreads between spot and futures contracts.

In addition, yesterday we discussed how the new influx of US Dollars into the economy from TALF will push the price of gold higher, just as it did after TARP was announced in 2008. This was the initial reason for gold to move back to its flight to safety status.

Over the last 3 days, spot market gold is from a low of 1455.4 to a high of 1627.7, an increase of 11.8% from low to high. Yesterday, we posted this chart and noted resistance at 1547.75, 1632 and the year highs near 1702 as resistance. Price has held 1632, for now. Support is at the psychological area near 1600, then yesterday’s nights near 1561.

Source: Tradingview, City Index

The front month gold futures contract has been even more volatile than in the sport market over the last 3 days, trading from a low of 1484.6 to a high of 1698, or 14.4%. The futures markets have to take time and interest rates into account when trying to determine a fair value for the contract, therefore futures markets usually trade at a higher price than spot. Notice how price took out the resistance at 1632.4 and is trading need the years highs of 1704. We can look at the previous horizontal resistance at 1632.4 as the first support level.

Source: Tradingview, Comex, City Index

With the flood of US Dollars into the markets, firms won’t need to sell as many assets to raise cash for margin (as they can borrow more Dollars), as we saw with the selling of gold last week. As firms use this new cash as a backstop, there is also new cash to flow into gold. With the large demand, especially in the EFP market, gold should continue to push even higher. All-time highs in gold prices could be in the cards over the next few months, above 1912!

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.