The Risk of Universal Import Tariffs Causes Turmoil in Global Gold Market
The risk that US President-elect Donald Trump will impose universal import tariffs is causing fresh turmoil in the global gold market, with a closely watched barometer of bullion demand reaching historic highs in London.
Surging Demand for Gold and Silver
In recent weeks, US prices for gold, silver, and other metals have surged above other international benchmarks. That comes as major bullion dealers and fleet-footed investors respond to the risk that precious metals will be caught in the crossfire if Trump follows through with campaign-trail pledges to impose tariffs of as much as 20 per cent on incoming goods from all countries.
Lease Rates Reach Historic Levels
Now, a spike in so-called lease rates in London last week signals that an increasingly frenetic global hunt for bullion is underway as major dealers seek to shift metal to the US before any tariffs are imposed. Lease rates reflect the return that holders of bullion in London’s vaults can get by loaning their metal out to other buyers on a short-term basis. Normally, the returns on offer sit close to zero, but last week they’ve surged to historic levels, with profits on one-month lease rates exceeding 3.5 per cent on an annualized basis.
The Markets are in Total Dislocation
"The markets are in total dislocation," Robert Gottlieb, a former precious metals trader and managing director at JPMorgan Chase, the world’s top bullion dealer. "There seems to be a scarcity of available stocks in both gold and silver."
Bullion-Dealing Banks Play a Key Role
Bullion-dealing banks such as JPMorgan and HSBC play a key role in ensuring that precious metals prices move in lockstep between London and New York, and alongside high-frequency trading firms and hedge funds, they often bet against major dislocations between the two key trading venues. If futures on New York’s Comex exchange rise significantly above London prices, they can sell the former and buy the latter to bring the market back into balance, in what’s known as an arbitrage trade.
The Pain Trade
Gottlieb thinks it’s likely that gold and silver would be excluded from any tariffs due to their status as monetary metals, but he said many traders are nevertheless being forced to close out their positions as their losses grow. "It’s what I call the pain trade," Gottlieb said. "At some point, you’re gonna bite the bullet."
Silver Squeeze
Some industry experts said the tariff-related disruptions may be expediting a supply squeeze in the silver market that will lead to a spike in prices. "President-elect Trump’s threat of universal tariffs is accelerating the timeline to depletion" of the free-floating stockpile in the world’s largest vaulting system in London, said Daniel Ghali, senior commodity strategist at TD Securities.
Conclusion
The risk of universal import tariffs is causing significant turmoil in the global gold market, with lease rates reaching historic levels and a surge in demand for bullion. The situation is being exacerbated by the potential for a supply squeeze in the silver market, which could lead to a spike in prices.
FAQs
Q: What is the risk of universal import tariffs?
A: The risk is that US President-elect Donald Trump will impose tariffs of as much as 20 per cent on incoming goods from all countries, which could cause significant disruptions to the global gold market.
Q: What is the impact of the tariffs on the gold market?
A: The tariffs could cause a surge in demand for gold, leading to higher prices and a shortage of available stocks.
Q: What is the situation with silver?
A: The tariff-related disruptions may be expediting a supply squeeze in the silver market, which could lead to a spike in prices.
Q: What is the role of bullion-dealing banks in the gold market?
A: Bullion-dealing banks such as JPMorgan and HSBC play a key role in ensuring that precious metals prices move in lockstep between London and New York, and alongside high-frequency trading firms and hedge funds, they often bet against major dislocations between the two key trading venues.
