The premium or discount in commodity futures refers to that the futures price due in the future is higher or lower than the spot price. Usually, a premium also means that the entire futures curve is tilted upward and the discount is downward. Because of the unique asset characteristics of gold, premium is a relatively normal phenomenon. However, in mid March, when the global financial market was in turmoil, gold had a rare discount, and the price difference was once as high as $20.
there are usually four factors that determine the premium and discount of commodity futures. Storage cost, high storage cost means that the futures price will be higher than the spot price; the actual interest rate, when the actual interest rate is higher, the futures price is generally higher than the spot price; the higher the income of the spot assets, the lower the futures price, because only by purchasing the spot assets can we obtain the income, such as the stock index dividend; and the convenience income, the more convenient the oil production, the higher the futures price Low prone to discount.
but for gold, the only factors that determine the spot price difference of gold futures are warehousing cost and actual interest rate. The two factors are positively related to the premium. It is normal that the gold futures price is higher than the spot price. So the gold discount (Figure 1 & amp; 2) can only be due to low real interest rates or negative warehousing costs, but it is hard to imagine the latter.
looking back at the financial market sentiment in the middle and late March, it was more like suffering. The extreme thirst for liquidity also caused the gold price to be sold off. In addition, the media’s explanation at that time was mostly seen in the suspension of gold trading and the suspension of aviation industry, which made physical gold unable to be delivered, resulting in a sudden increase in demand for spot gold, while futures gold suffered more selling pressure, resulting in the futures price being lower than the spot price.
another often overlooked explanation is that the discount reflects further fear of negative interest rates. Although gold doesn’t have any income, it is a relatively positive income asset if it means paying interest. Since the middle of July, with the crazy rise of gold, gold premium has also rapidly narrowed, even close to 0. If we explain from the perspective of real interest rate, the narrowing of current price gap in recent period is also in line with the narrative basis of this round of gold price rise.