Front-month gold futures jumped 5.9% to $1,660.20 a troy ounce in New York, extending a surge that began Monday. Tuesday’s advance was gold’s biggest one-day increase since March 2009. Silver, platinum and palladium all rose at least 7.6%, paring some of their recent declines.
The rally is a reversal for the metals, which had tumbled in recent weeks with investors liquidating easy-to-sell assets to meet margin calls and raise cash. For investors who had used stocks as collateral to buy other securities, banks can demand repayment when the value of those positions shrinks dramatically, resulting in the forced sale of unrelated assets.
This week’s surge has put gold back around a seven-year peak from March 9. Prices are up more than 30% from a low hit last April, with recent gains coming as traders brace for the coronavirus to tip the world economy into a recession.
“I’ve never seen anything like this,” said George Gero, managing director at RBC Wealth Management. “The demand is huge.” Mr. Gero still expects prices to remain volatile, with investors often needing to sell liquid assets to raise cash when markets fall rapidly.
The big moves up and down in precious metals are another sign of market fragility. Stocks, bonds and commodities have all been extremely volatile in recent weeks with the coronavirus halting the global economy and many traders working remotely.
There are also concerns about shortages of gold bars and coins because of heavy retail buying and refinery shutdowns in Switzerland, a major refining hub.
“This is an environment when most people work from home, even traders, and airlines aren’t flying, so there is some sort of discrepancy in the market,” said Frederic Panizzutti, managing director at MKS Dubai, part of refining and trading company MKS PAMP Group Co. “The market is in panic.”
One sign of stress: In the spot gold market, the gap between bid and offer prices has widened to around $25 an ounce, according to Mr. Panizzutti, when it would normally range between 20 and 30 cents. Meanwhile, the gap between futures prices in New York and spot prices in London, the world’s biggest wholesale gold market, jumped.
The London Bullion Market Association, the organization that oversees the U.K. capital’s gold market, said volatility in U.S. futures prices on the Comex division of the New York Mercantile Exchange had caused liquidity to decline. The LBMA and Comex discussed whether to allow traders to settle futures using gold from London without having it melted down and recast into a new set of bars, according to a person familiar with the matter.
This could ease a shortage of physical gold in New York but would require a rule change or relaxation. LBMA-approved bars weigh 400 troy ounces, while Comex futures must be settled using either one bar weighing 100 ounces or three bars weighing a kilogram each.
Hedge funds and other speculative investors sharply lowered net bets on higher gold prices during the week ended March 17, pushing them to a nine-month low, Commodity Futures Trading Commission figures show. Investors were liquidating bets on a range of assets to cover losses suffered in stocks and other riskier areas.
Data for the week ended Tuesday will be released on Friday.
The Federal Reserve’s pledge on Monday to buy an unlimited amount of government debt to shield the U.S. economy also drove gold prices higher. The opportunity cost for investors owning the precious metal, which pays no income, declines when bond prices rise and yields fall.
“We have now a lot of central banks with very, very low rates and quantitative-easing programs, which in general is positive for gold prices,” said Georgette Boele, a strategist at ABN Amro. “Investors are getting more concerned about the doom and gloom of the global economy and they want to have physical gold in their safe.”
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Extreme volatility in currency markets also drives gold, which is used in some countries as a liquid asset that can be turned into any currency depending on fluctuations. A weaker dollar was supporting Tuesday’s rally by making commodities denominated in the U.S. currency cheaper for overseas buyers.
Elsewhere in commodities Tuesday, U.S. crude oil added 2.8% to $24.01 a barrel, trimming a sliver of its recent declines. Tumbling demand and excess supply have sent prices crashing about 60% for the year. Brent crude, the global gauge of oil prices, ended the day up 0.4% at $27.15 a barrel.