CME resolving physical gold squeeze with delivery of 100-ounce, 400-ounce and 1-kg bars

Increasing pressure from market players and significant liquidity issues in the gold market are prompting CME Group to make some changes in how it delivers its physical gold.

Tuesday evening, the futures exchange announced the launch of a new gold futures contract with expanded delivery options that include 100-troy ounce, 400-troy ounce and 1-kilo gold bars.

The new contract is expected to launch with the first expiration of April 2020, pending regulatory approval, the exchange said.

"This time of unprecedented market conditions has led to growing demand for a broader range of delivery needs for our clients worldwide," said Derek Sammann, Senior Managing Director and Global Head of Commodity and Options Products, CME Group in a press release.

"By offering a choice of delivery sizes as well as inter-commodity spreads with our benchmark gold futures, this new contract will provide customers with maximum flexibility in managing physical delivery," Sammann added.

The news comes after an intense trading day in the gold space as the market has seen strong physical demand and dwindling supply.

According to reports, bullion banks across the board reported massive liquidity issues Tuesday in the physical market. The problem, according to many banks, was the Exchange For Physical (EFP) market, which allows traders to switch gold futures positions to and from physical. Spreads in EFP are typically around $2, but on Tuesday, because of a lack of supply, the spread increased as high as $40.

Part of the issue is the lack of specific gold bars. CME contracts are for 100-ounce bars. However, Good Delivery listed bar from the London Bullion Market Association are 400 ounces.

The move from the CME will help relieve some of the liquidity issues as future contracts could be filled with 400-ounce bars from the London Bullion Market Association.

According to reports, The LBMA and executives at major gold-trading banks asked CME to allow 400-ounce bars to be used to settle Comex contracts.

Earlier in the day, the LBMA said that it was working with the CME to resolve the liquidity issues.

"LBMA has offered its support to CME Group to facilitate physical delivery in New York and is working closely with Comex and other key stakeholders to ensure the efficient running of the global gold market," the association said in an email to Kitco News.

In an interview with Kitco News, Ole Hansen, head of commodity strategy, said that the price dislocation in the gold market Tuesday was a logistics problem and a breakdown in the supply chain because of the coronavirus.

"We don't have enough hands to handle all the demand," he said. "There is plenty of gold in the market, but it's not in the right places. Nobody can deliver the gold because we are forced to stay home."