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Gold prices sell off as major refineries reopen, analysts look for spot-futures spread normalization

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(Kitco News) Gold refineries around the world, including Swiss refineries and South Africa’s Rand Refinery, are restarting production. But is this good news for the wide spot and futures price spread that the gold market has been struggling to reconcile after the COVID-19 shutdowns were put into effect?

The latest news of Rand Refinery — Africa’s only refiner accredited with the London Bullion Market Association (LBMA) — came on Tuesday as Bloomberg quoted CEO Praveen Baijnath as saying that the plant will resume production this week after shutting down for one month. 

“Following an induction process for returning employees, the smelter for the arc furnace will be restarted this week and then ramped up,” Baijnath said. “We have established a good routine and have been able to ensure that product from our mining clients is shipped to us and that refined product makes its way to bullion banks and end user customers.” 

The news comes just a couple of days after two of the world’s biggest gold refiners — Valcambi and Argor-Heraeus — announced a resumption of almost all operations, citing Swiss authorities’ new relaxed coronavirus measures. 

“From today onwards we are allowed to go up to 100%,” Valcambi CEO Michael Mesaric said on Monday, but noted that the refinery would operate at about 85% capacity due to health and safety measures in place to protect staff.

Argor stated that it will be “completely operational” from May 4. On top of that, MKS PAMP Group refiner said that it will be increasing production, Reuters reported.

The three Swiss gold refineries, which process about 1,500 tonnes of gold a year — a third of global supply, have been under partial or full shutdown for the past six weeks due to the coronavirus outbreak heavily impacting the area. 

These closures and logistical issues have led to wide spreads between spot (London market) and futures (New York) prices. Refiners re-starting production might help normalize this spread, which under normal conditions does not vary more than a couple of dollars from each other. 

“The restarting of some gold refiners will help to bring the ‘spot’ price of gold to closer to the efficient price discovery in the cash gold market that was seen before the COVID-19 pandemic,” Kitco’s senior technical analyst Jim Wyckoff said on Wednesday. 

But to see a complete normalization, the gold market will have to wait until all or most gold refiners and commercial end-users are back to a state of normal operations, added Wyckoff.

Higher production levels will be key for gold traders as they might lower premiums, which surged this past month, said Kitco Metals global trading director Peter Hug. 

“With the opening of major refineries globally, we expect production levels of investment product to begin to normalize, which should reduce premiums in the coming weeks. This could be derailed, if investment demand spikes before the refineries are able to reach full production capacity,” Hug said in an email. “The opening up of the global refiners has produced supply for the futures markets for delivery requirements. The spreads between the most active futures markets to cash have contracted considerably, with the contango now almost completely in line with interest carry.”

Logistics issues with cargo also saw some normalization, Hug added. “It’s a tenuous balance, but the market is beginning to return to a more normal pattern.”

This normalization could be translating into some pressure for the gold price in the short-term, TD Securities head of global strategy Bart Melek told Kitco News.

“There will probably be some pressure. Another development is with charter planes, which had a difficult time getting insurance. That seems to have been worked out for the most part, where you can charter a plane and bring in Asian gold or European gold and 400 bars, which you can now melt and settle the comics. We've seen that premium come down to more normal levels here,” Melek noted. 

At the time of writing, June Comex gold futures were trading at $1,687.90, down 1.33% on the day and spot gold was at $1,684.10, down 1.29% on the day. 

“What we're seeing on the futures is probably some reallocation of funds in response to the continued strong risk appetite, manifested in the S&P 500, which is continuing to do well. We are very close to 2900 right now, recovering a big chunk of the losses from earlier in the year,” Melek said. “That essentially signals that probably for now there's not a huge expectations that gold is going to pick up. There might be some physical coming into the market to settle Comex. We are likely going to continue to see maybe some reallocation towards equities.”

At the same time, there is firm support at just below the current levels, said Melek added.

RBC Wealth Management managing director George Gero is also looking for a weaker gold market in the net week or two, stating that there will be more hedging against inventories.  

“Production re-started and even Perth is sending material to Comex. Spreads widen as more material is available and it means more hedging forward along with miners who need financing. This is temporary selling pressure and may attract buyers on dips if it continues,” Gero said. “Expected pullbacks until next week. Today, $1,700 sell stops and sudden dollar index strength added to pullback.”

From a technical perspective, gold could test support at $1,680 an ounce, said LaSalle Futures Group senior market strategist Charlie Nedoss. Next support level is at $1,657.70. 

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