First Under Supply Now Oversupply, What This Means for the Gold Price

First Under Supply Now Oversupply, What This Means for the Gold Price

If you have been following our coverage of the gold price over the past few months, then you have probably heard of the under supply problem.

That is, the physical price of gold was well above the financial market price.

Meaning there was a big difference between the price quoted on the exchanges and the price at which sellers were actually charging.

There are now signs that the demand for gold could be cooling.

It was a glum day in trade yesterday for the yellow metal, with hints for the first time in a fortnight that gold looks set to relinquish its key level of US$1,700.

The gold price made some gains overnight, potentially spurred on by growing US–China tensions, up 0.28% to US$1,714.

But the outlook could be a little shaky as the flow of physical gold becomes available.

COMEX is swimming in gold

According to Bloomberg, the gold market has been flipped on its head as physical gold inventories are now being flooded.

Since the end of March, 16.8 million ounces have flowed into Comex.

To put that into perspective, that’s more than the total increase in ETF holdings last year.

It’s also equivalent to India’s annual jewellery demand.

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Inventories stood at a record 26 million ounces as of Tuesday, dwarfing the 9.6 million ounces worth of June contracts still open.

This matters because contracts sold before the coronavirus pandemic drove futures to the highest premium to the spot price in four decades.

Spot gold price (blue) and June futures contract (red) year-to-date

Source: Trading View

The June contract is now trading below spot prices, after fetching a $12 premium as recently as mid-May and $60 in March, according to Bloomberg.

Now it seems contract holders are trying to avoid taking delivery from the massive inventory.

Similar to the plunge in the crude oil price, gold futures traders don’t want the logistical hassle of holding physical metal.

What does this mean for the gold price?

The flooding of the New York market is a localised phenomenon, and the price of gold remains high around the world.

While no one is expecting gold to repeat the behaviour of oil when crude stockpiles surged after fuel demand plunged, it has created some odd occurrences for sure.

Spreads between COMEX futures and London spot prices have blown out on occasion caused by traders rushing to avoid delivering on contracts.

Instead they bought back contracts they had sold short, pushing up premiums.

Now with physical gold in plentiful supply, the lofty premiums we’ve seen could disappear.

For now, it remains a ‘seller’s market’.

This, of course, does not mean you shouldn’t own physical gold. After all, we’ve just seen that being the owner of physical gold comes with solid premiums. Our resident editor here at The Daily Reckoning Australia and gold expert — Shae Russell – has put together one of the most practical and easy to understand FREE guides on how to invest in the yellow metal in Australia right now. You can get it here.


Lachlann Tierney,
For The Daily Reckoning Australia