Spread in gold and silver is a market confidence issue - Sprott Money
(Kitco News) - Liquidity in the gold market is improving but the spread between spot prices and Comex future prices remains extremely wide. One market analyst said that this persistent issue is more about confidence in the marketplace rather than supply.
Although there is an ample supply of gold in the marketplace, Craig Hemke, precious metals expert at Sprott Money, said in a commentary that there are still ongoing concerns about the market ’s supply chain. This lack of confidence is a factor in why investors are not taking advantage of the clear arbitrage in the precious metals market.
Thursday, ahead of the Easter long weekend, June gold futures pushed to a fresh multi-year high of $1,754.50 an ounce, meanwhile spot gold hit a session high of $1,690.33. That is a price difference of more than $64. Two weeks ago the price spread at one point was around $100.
Hemke explained that investors could buy 100 ounces of gold at spot and sell one futures contract. At Thursday ’s peak that would have provided an investor an easy profit of $6,400 by the end of the June contract.
“That should be an easy, risk-less trade, and the result should be a narrowing of the spread back to near zero. To me, this recurring spread between spot and June futures is a sign of ongoing tightness and, more importantly, loss of confidence in the fractional reserve pricing system,” said Hemke. “The only reason someone wouldn't immediately execute the arbitrage trade described above is out of fear that you won't have the 100 ounces in hand when the time comes to deliver it in June.”
Although a lot of analysts have focused on the supply crunch in gold, Hemke said that the same scenario is also playing out in silver.
Thursday May silver futures rose to a nearly a one-month high at $16.09 an ounce. Meanwhile spot silver rose to $15.45 an ounce, a 64-cent spread.
“So is the problem that ‘the silver is just in the wrong place’, too? Or again, is this is a crisis of confidence,” he said. “Obviously there's not sufficient confidence that the silver bought at spot today will be handed over in time to deliver in New York in three weeks hence.”
Hemke also noted that the wide spreads in gold and silver could lead to manipulation in the marketplace as firms or banks would just need to sell a little bit more physical to widen the spread to an attractive enough arbitrage opportunity, which would send paper gold and silver crashing lower.
Although liquidity issues continue to persist in the precious metals space, Hemke said that investors just need to be patient as prices are ultimately going higher.
“Runaway rallies may be difficult to sustain, but the ever-growing realization that [QE-infinity] is upon us will continue to provide a bid for gold and silver in all their forms,” he said.