Gold Spot-December Futures strategy | Century Financial

1. Gold Spot-December Futures strategy One among the many odd events of the Coronavirus pandemic happened in the Gold markets when the spread between London spot gold and New York futures which usually trades within a few Dollars rose to near triple digits in the last week of March. It was not like the world suddenly ran out of gold, however there was a lack of gold in the desired proportions. Gold markets in London (spot price) deal in the 400 ounces bar whereas 100-ounce bars are delivered against New York futures trading in Comex. In normal times, the conversion of larger London bars into COMEX-acceptable units is a seamless process. The Coronavirus pandemic, however, forced the refineries to temporarily suspend operations and disrupted flights between many nations. This drove traders into panic as many feared that there will be a shortage of 100-ounce bars for delivery in New York and led to the surge in premiums. With many countries now relaxing their lockdown measures, two of the world’s biggest gold refiners are almost back to pre-COVID-19 operations. Besides, Insurance firms have started covering charter flights to carry gold. The cost of transportation of Gold by chartered flight is estimated at $1 per ounce while it is reported that some Swiss refiners are charging $5 to $10 per ounce for spot supplies of kilobars. The premium for spot supplies of kilobars normally tends to be $1 per ounce. Nevertheless, even with the elevated premiums, the current spread between Gold spot and futures seem unsustainable. A spread of more than $20 is attractive for taking positions. Currently, Gold Spot and December Futures contracts spread is trading at $29 (Futures premium to cash). The lowest in the last 1 year has been -$20 and the highest has been $70 on a daily closing basis. (Intraday high was more than $90 in the month of March). As can be seen in the charts, the spread took resistance near $35 region and is expected to contract towards the lower end of the range. i.e. Gold cash is expected to outperform Gold December futures.

2. Long cash (spot contract) and short futures strategy could be profitable if the spread narrows irrespective of price movement on the upside or downside. On the other hand, it could result in losses, if the spread widens further. If the spread breaks the near-term resistance of $36, it can potentially then test the next resistance of $52 in which case the trade would result in a loss of nearly $16000. If the spread widens to a previous intraday high of near $100 it would result in a loss of $40,000. Price Quantity Exposure Gold Cash $1,807 500 $903,500 Gold December $1,836 500 $918,000 Spread $29 Probable Gain if spread reduces to 0 $14,500 Holding rate -1.50% Daily holding charge -$37.13 Total holding charge till expiry (27 Nov 2020) -$4,975 Probable return if spread reduces to 0 $9,524 Product idea example Risks & Assumptions: There is always a possibility that futures and spot prices might not converge, as that has happened in the past. Considering high volatility in markets, $75K should be maintained in

3. the account, as per the above illustration. Additional funding might be required if the spread widens beyond $100. With US elections around in November there is always a possibility for the spread to widen to $150 resulting in further losses and additional funding. Holding rate is currently at 1.5% and can change in the future impacting the trade either negatively or positively. The testing environment has not considered transaction or any other costs. Returns may vary if there is any error in executing the trades. Data Source: Bloomberg Arun Leslie John Chief Market Analyst Disclaimer:Century Financial Consultancy LLC (“CFC”) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA).This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. CFC does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Please carefully read disclaimer mentioned below/next page/next frame. PLEASE READ THE FOLLOWING TERMS AND CONDITIONS OF ACCESS FOR THE PUBLICATION BEFORE THE USE THEREOF. By use of the publication and continuing to access the publication, you accept these terms and conditions and undertake to be bound by the acceptance. CFC reserves the right to amend, remove, or add to the publication and Disclaimer at any time without any prior notice to you. Such modifications may be effective immediately or otherwise. Accordingly, please continue to review this Disclaimer whenever accessing, or using the publication. Your access of, and use of the publication, after modifications to the Disclaimer will constitute your acceptance of the terms and conditions of use of the publication, as modified. If, at any time, you do not wish to accept the content of this Disclaimer, you may not access, or use the publication. Any terms and conditions proposed by you which are in addition to or which conflict with this Disclaimer are expressly rejected by CFC and shall be of no force or effect. No information as given herein by CFC in this publication should be construed as an offer, recommendation or solicitation to purchase or dispose of any securities/financial instruments/products or to enter in any transaction or adopt any hedging, trading or investment strategy. The data/information contained in the publication is not designed to initiate or conclude any transaction. Neither this publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this publication does not oblige CFC to enter into any transaction. The information in this document is not intended, by itself, to constitute independent, impartial or objective research or a recommendation from CFC and should not be treated as such. The content of this publication should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this publication. CFC cannot be held responsible for the impact of any transactional costs or any taxes as may be applicable on transactions. Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that CFC considers reliable. However, CFC makes no representation or warranty as to the accuracy or completeness of any report or statistical data made in or in connection with this publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this publication. References to any financial instrument or investment

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