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.
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.
Now, a spike in so-called lease rates in London last week signals that an increasingly frenetic global hunt for bullion is under way 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 annualised basis.
That’s the highest level since at least 2002, and it signals surging demand for metal in London’s vaults. There have been similarly extreme moves in the silver market, and some analysts and traders warn that there may not be enough freely available metal to meet dealers’ needs.
“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.”
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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.
If the spreads keep rising, investors can incur heavy losses as they seek to unwind their positions, and their efforts to buy their New York futures contracts back risk sending prices spiralling even higher.
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.”
Meanwhile, major bullion-dealing banks can ultimately back out of arbitrage trades by physically moving metal between key trading hubs, and some captured huge profits doing so during the last major dislocation in the early stages of the Covid-19 pandemic.
The spike in lease rates in London suggests that the rare and lucrative trade is once again gathering pace.
“If you’re a trader and you can find someone who’s willing to sell you outside the US at a discount to the US price, and then ship it to the US on an airplane and sell it for US$40 more, you’re going to do that,” said Max Layton, global head of commodities research at Citigroup. “So of course there’s a scramble.”
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. He expects silver prices to average US$38 an ounce by year end, a 31 per cent increase from in 2024, and sees a supply crunch this year despite a significant slowdown in expected demand growth.
The pre-emptive trades have seen inventories of silver at Comex warehouses swelling since mid-December, with more than 22 million ounces added. This comes as stockpiles in London already near a critically low level after four years of large deficits in global mined production, according to Ghali.
Not all silver in London vaults is readily available to be shipped. Part of the stockpile is tied in exchange-traded funds physically backed by the metal. Excluding silver ETFs, TD estimated that free-float inventory in London stood at around 305 million ounces by the end of December.
London also is the over-the-counter market for precious metals – the main place for trading in physical metals including silver. And 250 million ounces of silver have been required on average for daily trading during the last five years, TD estimates show. That means only 50 million ounces remain as at the end of December until the withdrawals of readily available stockpile in London dips below average daily trading volume.
This critically low cushion is being tested by the ongoing withdrawals, according to Ghali. He sees the situation as a compelling setup for “explosive” price spikes, requiring higher prices to unlock inventories from unconventional sources, he said.
Still, there’s a possibility that the material tied in ETFs can be freed up if the silver market is in a so-called backwardation, where spot prices are traded at a premium against future-dated contracts, according to Marcus Garvey, head of commodity strategy at Macquarie Group Ltd.
There is also “very ample availability” of above-ground silver stocks, and a rally in prices could induce more recycling, Garvey said.
“To be fair, that would be a somewhat squeezy market at first to incentivise that,” he said. “But then the market would respond to that price signal.” BLOOMBERG
