How HSBC lost in one day what is hopes to make in an entire year; gold proves disastrous for this bank

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Updated: May 15, 2020 12:21 PM

HSBC Holdings Plc lost around $200 million in one day in March because of disruptions to the gold market that caused prices to diverge dramatically in key trading hubs, according to a filing by the bank. 

The one-day loss was unusually large for a market in which the leading banks — which include HSBC and JPMorgan Chase & Co. — typically hope to make around $200 million in an entire year.

By Jack Farchy and Harry Wilson

HSBC Holdings Plc lost around $200 million in one day in March because of disruptions to the gold market that caused prices to diverge dramatically in key trading hubs, according to a filing by the bank. The one-day loss was unusually large for a market in which the leading banks — which include HSBC and JPMorgan Chase & Co. — typically hope to make around $200 million in an entire year. It far exceeded the maximum loss anticipated by HSBC’s value-at-risk models.

HSBC’s loss highlights the extreme nature of the disruption to the gold market in late March, as lockdowns closed refineries and grounded planes, strangling the supply routes that allow physical bullion to move around the globe.

The price of gold futures in New York and spot gold in London, which usually trade within a few dollars an ounce of one another, diverged by as much as $70 — the most in four decades. The divergence hit banks that are active in trading the so-called EFP, or Exchange for Physical, the mechanism by which traders switch positions between the New York and London markets.

HSBC, which had disclosed in a previous filing that it was hit by the gold market disruption, revealed the scale of the loss in a chart this week showing its daily trading profits for the first quarter.

The bank described the loss as a “mark-to-market loss mainly associated with gold refining and transportation challenges.” It highlighted the “unprecedented widening of the gold exchange-for-physical basis,” which “affected HSBC’s gold leasing and financing business and other gold hedging activity leading to mark-to-market losses.”

HSBC declined to comment.

In the past week, the price difference between the New York and London markets has returned to more normal levels of less than $5 an ounce. Still, HSBC is not the only one struggling with the unusual moves in the gold market. Banks often sell gold futures in New York to hedge their positions in the London market, exposing them to significant losses should the two markets diverge.

As a result, some banks have stepped back from trading the EFP in recent weeks. And Canada’s Bank of Nova Scotia, for years one of the leading bullion traders with a business that dates back to the 17th century, told staff in April it was shuttering its precious metals unit.

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