HSBC Hit Hard by Delivery Disruptions in the Gold Market

SEATTLE (Scrap Monster):  HSBC Holdings Plc blamed delivery disruptions in the gold market for back-to-back breaching of its value-at-risk limits during the month of March this year. The trouble in bullion shipments on account of lockdown measures introduced by various countries also accounted for notable price variance in key markets.

In a filing to the exchange, HSBC noted that it had breached its value-at-risk limits 12 times in March. Normally, the breach occurs only up to three times in a year.  

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The closure of refineries and halt in air plane services impacted movement of physical gold among major trading hubs. This led to high illiquidity of gold market and huge divergence in gold futures prices in New York and spot gold in London. In fact, the price divergence hit the highest level in almost four decades, thereby impacting trades involving switching of positions between the two international markets. The price difference between the two markets surged to historical highs of up to $70 per ounce.

Also, the bank noted that high volatility in markets along with unfavorable valuation adjustments for physical transactions have led to reduced trading revenue from metals. HSBC reported $1 million loss in metals trading revenue in Q1 this year. This compares with $38 million profit reported during the corresponding quarter a year before.

In fact, HSBC is not the first bank to be hit by metal market conditions. Recently, Canadian Bank of Nova Scotia (Scotiabank) had announced winding down of its metal business.