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New York has a glut of gold as banks don't want the stuff - analyst

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(Kitco News) - In a month, the gold market went from facing a supply crunch to now facing a massive glut. According to some analysts, both scenarios continue to highlight ongoing issues with the precious metals supply chain that could cloud price forecasts.

In March, as the world went into lockdown in an effort to slow the spread of the deadly COVID-19 pandemic, the gold market was faced with a significant disruption in its global supply chain. Since then, Comex warehouses have seen its gold inventory rise to a record level. Data from CME shows that since the end of March, 16.8 million ounces have flowed into Comex. Currently, inventories total 26 million ounces as of Tuesday.

The gold glut in the U.S. was confirmed by the trade data from Swiss Federal Customs Administration earlier in the week. The numbers showed that Switzerland exported 131.8 tons of gold in April, which was the highest since last August. The majority of the gold, 111.7 tons, went to the U.S.

“To put this into perspective, at an average of less than 2 tons per month, the U.S. accounted for only 1% of Swiss exports over 2014-2019,” analysts at Metal Focus said in a report Wednesday. “Growing concerns about a shortage of physical gold deliveries on Comex (as a result of coronavirus lockdowns) was the key driver behind this surge.”

Ole Hansen, head of commodity strategy at Saxo Bank, said that the glut in the gold market is not surprising, considering the massive supply issues the market faced in March. However, he added that the extreme amount of gold being housed is a significant concern.

“It’s better to have too much gold than being caught short again, but it still shows that the global supply chain remains incredibly fragile,” he said.

Hansen said that a major issue in the market, adding to the massive supply, is the persistent still liquidity problems. Banks have been reluctant to play their role as the “middle man” in the physical markets.

In March, because of the impact of the COVID-19 pandemic, bullion banks across the board reported massive liquidity issues in the physical market. According to many banks, the problem was the Exchange For Physical (EFP) market, which allows traders to switch gold futures positions to and from physical. There wasn’t enough gold in the right format to meet a growing need in the marketplace.

Hansen said that the price discovery in the gold market hasn’t been fixed because banks are still hurting from the EFP issues two months ago.

“The banks were hit pretty hard and they lost their appetite for physical gold right now,” he said. “That man in the middle is not likely to return anytime soon.”

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