Coronavirus lockdown requires precious metal commodity markets to be closed immediately

RN Bhaskar – 10 April, 2020

Experts in the commodity markets in India have appealed to the government to suspend all commodity trades in precious metals.

This is because hitherto, physical deliveries and paper trade co-existed. Moreover, as precious metal trade (in gold and silver) has been restricted to domestic players only, the trade depends on easy availability of the two metals for closing deliveries and squaring off transactions.

One could always use physical deliveries to square off paper trades in case the latter got too speculative, or vice versa. But with physical deliveries becoming difficult, commodity markets for gold and silver have become highly fragile and speculative. “The market is fragile and not very healthy,” says Bhargav Vaidya who advises the RBI and the commodity exchange administrators on the state of the markets.

Typically, almost 80% of the commodity trade in metals is for gold and silver.  Physical deliveries are invariably made through the vaults where gold is stored with banks.  Or it is met through gold airlifted to India. Gold, unlike silver, is invariably transported through air because it is a low volume high value commodity

But with movement of gold getting restricted on account of the lockdown, speculative trade has become unhealthy.  Savvy marketmen keep a track of when gold is likely to be allowed out of the vaults, or when some delivery of gold will be made by aircraft.  However, with unloading operations relating to aircraft cargo also becoming uncertain, insider trade has become rampant.

Hence, if the lockdown continues beyond 14 April 2020, there is a need for such trade to be highly restricted.

It may be recalled that the government has already restricted trading hours in commodity markets.  Earlier trading in precious metals would begin at 10 am and would continue till 11 pm.  This is because a great deal of price discovery used to take place either in London or in New York. However, after the lockdown was announced, it has been restricted from 10 am to 6 pm.

The government has now been urged to suspend trading in precious metals altogether till the lockdown conditions are eased.