Disruptions in the Physical Gold Market
The global production freeze and the border closures, combined with the market stampede and mass flight to safe havens, created unique pressures in physical precious metals. A supply shock and a demand spike hit the market at the same time and created unprecedented challenges that even some of the largest players in the industry struggled to overcome.
Starting in late February and escalating in March, a global shortage of gold bars left a growing number of traders and brokers unable to fill orders. As demand surged, especially from retail investors, and as the metal saw its sharpest rise in a decade, the supply disruptions led to long delays and unusually wide spreads between Comex futures and London cash spot market prices.
The economic shutdown had a deeply paralyzing impact on the gold market. Swiss refineries Valcambi, PAMP and Argor-Heraeus had to suspend production for two weeks, in order to comply with local authorities’ orders demanding the closure of all “non-essential” industry. Between them, they process around 1,500 tons of gold a year, a third of global annual supply, while they are also a key hub and transit point in the global gold industry. They only recently received permission to resume production, and only at a limited rate. Valcambi and PAMP confirmed that this meant they would operate at less than 50% capacity. On top of the production freeze, there were also serious problems created by the various lockdown measures and travel bans, causing numerous disruptions in the logistics chains and transport of the metal.
As a result, large gold retailers like Degussa struggled to meet demand and fill orders. Some of the most popular formats and coins like the Krugerrand appeared as sold out and out of stock on their online platform. Other brokers and retailers had very long delays in delivery, while others even ceased operations altogether, even as orders remained unfilled in the pipeline.
It was a trying time for us too at Global Gold, as we also experienced a spike in new orders. However, our systems and internal processes proved to be robust and reliable, even under these extraordinary pressures. It was a fast-paced race, but our team did go the extra mile and we managed to meet the needs of all clients.
We expect demand to remain strong, and even spike higher as the crisis deepens, but we are already prepared for that and we remain confident in our continued ability to serve our clients.
Overall, this industry-wide shock did cause numerous problems for many in the industry, but we believe that it also served as a valuable reminder, to both retailers and gold investors. If you see physical gold as we do at Global Gold, namely as the ultimate hedge and as your last line of defense against a serious crisis, this mentality must also guide the assessment of your partners. In other words, what good is your harsh-crisis investment if you can’t access it in a harsh crisis scenario? And what good would be our advice, to be prepared and to plan ahead, if we ourselves were to buckle and throw in the towel at the first sign of trouble?