Just recently, the gold under pressure fell more than 1% as the US dollar staggered near a more than 1-week high. However, the commodity managed to hold above $1,700 per ounce. This was mostly because of the rising fears of a second wave of COVID-19 infections across the world.
For instance, the US gold futures went down by 0.6% holding at $1,726.50 an ounce and spot gold plummeted by 0.6% to $1,719.67 an ounce.
A Risk-Off Mood
According to David Meger, High Ridge Futures’ director of metals, it is during such times that the US dollar becomes a favourable asset, which puts gold under pressure. Furthermore, he contends that the sector is continuously crawling down, especially after the US Federal Reserve meeting.
The gold market has not received more additional monetary stimulus from the Federal Reserve. The Bullion also facing short-term deflationary measures.
More countries are continually recording dozens of new cases of the novel virus in the past few days, as infections continue to sweep across the US and African countries.
However, with the slow reopening of economies by different nations and the drop in consumer demand, inflation is gradually collapsing, which removes the demand for gold, putting gold under pressure.
Even as speculators in commodity trading continue to cut their bullish positions in their silver and gold contracts with COMEX in early June, there is still significant resistance at about $1,740 per ounce and the flow of funds is inadequate.
However, the virus fears pushed Wall Street into keeping the gold rate above the psychological level of $1,700 as many analysts contend that the long-run gold trajectory is still positive amidst the virus fears.
Other trading commodities like platinum rose to $812.84 per ounce by 0.9%, palladium fell to $1,914.85 by 0.2% an ounce while silver fell to $17.29 by 0.9%.
Supply Shortage Putting Gold under Pressure
Gold has always been a safe haven in commodity trading. This means that when people are uncertain about the future, their first instinct would be to turn their focus to gold to protect their savings. However, today that is rarely true.
Due to the coronavirus pandemic that has hard hit the entire world, there have been disruptions in the supply of raw materials and surging demand. This has created a shortage in the commodity, particularly the small gold bars that are popular among consumers.
The few that manage to get them must cough up a few dollars above the per-ounce prices of gold trading as seen on the financial markets in New York and London.
What is putting gold under pressure is the size. Although there is plenty of gold in large trading hubs such as London among other institutional investors who use bars of 400 ounces, regular traders may not be particularly willing to spend more on one bar since they prefer trading in smaller bunches.
These smaller bunches are quite hard to find because of among many other reasons the surge in demand. The supply sector has not been spared either. The lockdowns and global travel restrictions have caused mints and raw materials refineries to halt their operations of cap production.
This causes an unprecedented situation where the exploding customer demand and the disconnect existing between spot prices and physical prices drives the buy premiums to high levels.
What is the Gold Market Concerns Due to Coronavirus?
The gold trading sector has especially been affected by the second wave of COVID-19 infections. Analysts believe that the widening per-ounce premium, which is the highest spread in history, reflects concerns over the surging retail demand for the commodities.
The closure of Swiss canton Tocino, which is one of the largest gold refineries in Europe, amidst the virus spread is making it difficult to get gold to the right place at the right time.
The banks in London mostly use the COMEX traded futures to hedge their physical trades to consumers. However, this relationship has since been severed because of the global shortage of 100-ounce gold bars. These gold bars are especially important in settling the New York futures contracts.
Furthermore, flight cancellations have also made shipping gold incredibly challenging.
Since the spot market and futures market trade closely, when they start drifting far apart, it is possible to confidently enter an arbitrage. This is because, as a trader, you are sure you won’t lose your money. The confidence is no longer there because now traders cannot move the raw materials around.
According to the founder of Commodity Discovery Fund, Willem Middlekoop, the system has been overwhelmed by the demand for gold. He believes that this would not have been the case if the Swiss refiners were still in operation. This is a huge reason for concern because what was a safe haven investment is now in shortage, fuelled by the coronavirus pandemic.
The precious metals in the whole world are now caught up in a wider tumble in the commodity trading markets as the virus continues to spread. Because with this Gold under pressure times some investors are even forced to sell their assets to cover their margin calls.
If the virus fears continue weighing down on gold trading markets, gold will remain under pressure. This is despite different institutions like US Federal Reserve and London Bullion trying to calm the global financial markets by placing emergency rate cuts.
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