Physical gold is in short supply as investors chase safety from coronavirus turmoil

Quick Take

  • There have been wide reports of a global physical gold shortage as demand surges and supply chains are disrupted by the spread of coronavirus
  • The price of gold experienced a correction last week but soon bounced back after the Fed announced its unlimited stimulus measures – echoing a similar move in 2008 during that period’s emergency Fed moves
  • Bitcoin’s price has shown the strongest correlation with gold in 10 months, according to new data.

The world is facing a shortage of physical gold amid supply chain interruptions, investor flights to safety and major actions by the U.S. Federal Reserve to shore up the financial system.

Per Bloomberg data, the premium of gold futures over the spot price of gold hit its highest level in decades. This development comes as desperate investors try to put their funds in the more liquid derivative as an alternative way to shield themselves from the turbulence reigning in global equity and commodity markets.

Sources: The Block, CoinMetrics, FactSet

Reports also indicate that major gold refiners have been idled to curb the spread of coronavirus and that border control measures and flight route suspensions have also exacerbated the situation. 

Indeed, the London Bullion Market Association and several major banks have asked the U.S. derivatives exchange CME Group to change delivery rules for the precious metal to ease trading disruption, per a Reuters report

Underpinning these supply issues is a strong bullish sentiment for gold among investors.

Despite suffering a 7% correction from its peak last Thursday as investors, the price of gold soon climbed this week after the Fed undertook a series of stimulus programs aimed at buttressing the U.S. economy. Gold is trading at roughly $1618 per oz at press time. 

In a March 23 research note sent to clients, Goldman Sachs contended that gold's comeback is somewhat expected. A similar trend was observed during the 2008 financial crisis when gold first plunged by 20% then bounced back after the announcement of the Fed's $600 billion quantitative easing program.

Now, the Fed seems to be updating its playbook. On Monday, the central bank announced major measures to supply "the amounts needed" to buy government bonds and mortgage-backed securities. The Fed issued emergency rate cuts on March 3 and 15, and also began buying up commercial debt and established new lending facilities to keep the credit market afloat. 

Sources: The Block, The Federal Reserve

"We are likely at an inflection point where 'Fear'-driven purchases will begin to dominate liquidity-driven selling pressure as it did in November 2008. As such, both the near-term and long-term gold outlook are looking far more constructive, and we are increasingly confident in our 12-month target of $1800/toz," the Goldman Sachs memo stated.

Interestingly, the retail market does not seem to have picked up on the gold rush sentiment – at least on the popular trading app Robinhood. The 30-day rolling growth rate of gold exchange-traded fund (ETF) holders on Robinhood plunged below 10% while the growth rate of S&P 500 ETF holders jumped above 40%. 

Sources: The Block, Robinhood

Meanwhile, bitcoin also saw its correlation with gold reach a 10-month high last week. As of press time, bitcoin is trading at roughly $6,695.

Sources: The Block, FactSet, CoinMetrics

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