Instead the market has been focusing on the continued rally in global stocks and continued easing of lockdowns around the world. These developments have, despite improved but still dismal economic data, raised hopes that a V-shaped recovery may occur over the coming months. This is optimism we unfortunately do not share - with millions of workers unlikely to return to work, company earnings are likely to disappoint. Adding to this the unfortunate risk of the virus re-emerging as some economies attempt to open-up too soon.
On a product specific note the market has become somewhat uncomfortable about the continued decline in open interest and speculative longs held by funds in the CME gold futures contract traded in New York. Both have dropped to 12-month lows and while it may signal fading interest in gold, developments elsewhere are pointing to a product specific challenge and not the underlying itself.
The transatlantic disconnect that occurred between gold futures traded in New York and spot gold traded in London back in March, left many market makers with heavy losses. The link between the two markets is called the ETP (Exchange for physical). Once the spread between spot and futures diverge too much from fair value market makers step in to take the other side of the trade. EFP trading however depends on the ability to freely move gold from London to New York in order to arbitrage these spreads.
The pandemic temporarily shut transport routes and refining activity and it let to the blow out in spreads. A development which ended up costing market makers hundreds of millions of dollars in unrealized and eventually realized losses. As a consequence several market makers have closed down while others have had their trading limits cut. The risk of repeat has led to many investors and traders instead focusing on bullion-backed ETFs.
Total holdings in bullion-backed ETF’s now exceeds 100 million ounces with continued growth seen during the past couple of years. The two biggest ETF’s hold 50% of these investment with 36.4 million in the SPDR Gold Shares (GLD) and 14.2 million in the Ishares Gold holdings (IAU).