HiveComb

Despite the peak of market volatility being behind us, a few market disruptions continue to be demonstrated in some markets. Commodities continue to be where these disconnections continue to be seen. We have already seen negative oil prices which is a sign of the unprecedented situation markets have found themselves in as of late. Now, we continue to see how the difference of prices of certain assets continue to become unhinged between paper or derivatives and physical.

During the peak of the market volatility, I had an immediate interest to add to some of my precious metals physical portfolio as a hedge to conserving capital in the long term. When I called my local coin dealer, there was absolutely no inventory of Gold or Silver available to buy. Many investors had already called to take advantage of the low prices as the liquidation of futures contracts had impacted the spot prices of many commodities in March. I even searched online and saw that most dealers had limited inventory despite the increase in demand.

This has stuck with me since as I continue to believe that demand can outpace supply at any time given how fragile some of the markets and even economies seem to be these days. Despite the support and stimulus being provided, I believe that weakness will eventually come back as the likelihood of the infamous "V-shaped" recovery is ever less likely based on the data. We have started to see rebounds of the prices of some of these commodities but the availability of inventory remain lows when I research locally. Also, the premium being paid to purchase the physical asset has continued to grow as I cannot find an ounce of Silver below $20 despite spot prices on the futures contracts being below $17 recently.

It was interesting to read the reference article on how the current situation has challenged the markets of where physical and paper meet, at the settlement. Given how large the paper (futures) market has become, we see the risks of settlement as there is not enough of certain assets to even procure for settlement of the outstanding contracts in force! I continue to see this as a great opportunity to allocate to the exposure of precious metals in particular as some of the prices continue to be relatively low when compared to other periods in history where the economy has struggled. If we add the amount of liquidity being added to financial markets, I personally believe that the risk/reward scenario is great.

Since I could not find any physical assets to add, I added some of the ETFs of the precious metal to my small but growing equity exposure. One position is up over 40% since March which has played out well. I would gladly swap out the ETF position for the physical asset but it is still impossible to do so. Until the divergence of the paper and physical prices are resolved, I think the arbitrage can continue to be played. However, as we all know, markets can be irrational for a prolonged period of time so always need to be careful and diversify!