Banks reap gold trading bonanza from Covid-19 disruption

In March, disruptions to flights and refineries caused by coronavirus meant the price of gold per troy ounce in New York surged to US$70 above the price in London. Photo / 123RF

Banks are set to report bumper profits from gold and silver trading this year following a record-breaking price rally and the disruption to global supply chains triggered by coronavirus.

Precious metals revenues at the world's 50 largest investment banks are set to double this year to a nine-year high of US$2.5 billion ($3.8b), concentrated among a handful of banks, according to consultancy Coalition.

Analysts say the surge in revenue stems from a sharp rise in interest among investors for exposure to gold — either as a hedge or as a bet on rising prices — and rare anomalies thrown up by disruptions to global gold deliveries.

"If you have everything set up, it's more or less a free lunch," said Michael Widmer, an analyst at BofA Securities.

In March, disruptions to flights and refineries caused by coronavirus meant the price of gold per troy ounce in New York surged to US$70 above the price in London, a dislocation far beyond the normal gap of a few dollars. For a clutch of banks with large precious metals businesses, that opened up a rare opportunity.

Banks that could transport gold to New York were able to benefit from the dislocation, according to Amrit Shahani, an analyst at Coalition. They could deliver physical gold to settle against futures contracts trading at a higher price.

To complete the trade banks converted 400 ounce gold bars traded in London to the smaller 100 ounce bars to be delivered on to the CME, Widmer said.

Gold stored on the CME Group's Comex exchange has risen fourfold since March to more than 37m ounces of gold worth around US$69b. As a result the premium for gold futures on Comex has now fallen to about US$4 over the London price of gold. "It's a trade that worked well but the market has fixed itself," said John Reade, chief market strategist at the World Gold Council.

Gold prices hit a record high of over US$2,000 an ounce in August while silver prices rallied to a seven-year high of US$30. But gold has since fallen back to trade at US$1,870 an ounce.

Banks with vaults in London, including HSBC, JPMorgan Chase and China's ICBC Standard Bank, had also gained revenues by storing gold to back exchange traded funds, said Shahani. More than US$60b has been invested in gold-backed ETFs this year, according to the World Gold Council.

This year, banks including Barclays, Goldman Sachs and Morgan Stanley have increased their precious metals trading, according to people familiar with the market. Deutsche Bank had also hired more precious metals traders, they said.

Goldman Sachs said it had seen increased "client flows" this year into precious metals as a result of Covid-19. Morgan Stanley declined to comment. Barclays and Deutsche Bank did not immediately respond to a request for comment.

Shahani said that other banks were unlikely to bulk up in commodities now. "No one is coming back with US$10b to trade commodities — no one is coming back in that fashion unless this revenue uptick is sustained for the next two to three years," he said.

Overall, commodities revenue at banks is set to hit its highest levels in 10 years at US$7b this year, according to Shahani, due also to large moves in oil prices. Brent crude prices have risen from below US$20 a barrel in April to above US$45 at the end of August.

Written by: Henry Sanderson

© Financial Times