The wild hunt for 100-ounce gold bars

There are few corners of the global financial market that have been upended as spectacularly, or as oddly, by the coronavirus pandemic as gold trading.

Not only are prices swinging in an erratic fashion — surging one moment and crashing the next –that is undermining the metal’s vaunted status as a haven in times of crisis, but major logistical disruptions have also kicked off a frantic hunt for actual bars of gold.

At the center of it all are a small band of traders who for years had cashed in on what had always been a sure-fire bet: shorting gold in the futures market. Usually, they’d ride the trade out till the end of the contract when they’d have a couple of options to get out without marking much, if any, loss.

But the virus, and the global economic collapse that it’s sparking, have created such extreme price distortions that those easyexit options disappeared on them. Which means that they suddenly faced the threat of having to deliver actual gold bars to the buyers of the contract upon maturity.

It’s at this point that things get really bad for the short-sellers.

To make good on maturing contracts, they’d have to move actual gold from various locations. But with the virus shutting down air travel across the globe, procuring a flight to transport the metal became nearly impossible.

If they somehow managed to get a flight, there was another major problem. Futures contracts in New York are based on 100-ounce bullion bars. The gold that’s rushed in from abroad is almost always a different size.

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The short-seller needs to pay a refiner to re-melt the gold and re-pour it into the required bar shape in order for it to be delivered to the contract buyer. But once again, the virus intervenes: Several refiners, including three of the world’s biggest in Switzerland, have shut down operations.

Signs of distress picked up on Friday, when the cost to swap New York futures and spot physical gold in London rose to about $2. Typically, this trade cost almost nothing.


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