The surprise tariffs is clearly catching the market off guard as we see a surge now in COMEX futures as compared to their counterpart in London. Essentially with the tariffs now, it just means that gold will be more expensive in the US market as opposed to overseas markets.
And that is leading to the uncommon price discrepancy we’re seeing with regards to the price futures between the COMEX and LME. In a typical scenario, the prices should only differ due to contract specifications – which are backed by the physical delivery of the underlying metal.
But before any gold is transported to the US from London, it has to go through refineries in Switzerland to be recast. That is due to COMEX requiring different bar sizing for their contracts. Then only is the gold transported to the US for physical delivery. Hence, that is where the tariffs come in and making it more expensive for gold prices in the US now. That as well as Switzerland also refines roughly 90% of gold sourced from industrial mines.
So, what’s next for gold prices if this is the case?
The thing to note is that markets were not quite prepared for this tariffs announcement. The gold rush into the US that we saw back in January and February didn’t quite continue and now markets are left with their heads in their hands for the most part.
In turn, that could lead to a potential funding stress that UBS warns here. It’s a good read if you haven’t gotten to it earlier to understand what the potential ramifications of the tariffs could be.
But at least for now, gold lease rates have yet to surge amid the latest developments. The 1-month forward is roughly at -0.18% as opposed to the start of the year eruption to a whopping 5%. (h/t @ zerohedge)
This suggests that there is good amount of supply of gold in London for the time being.
How does this impact the spot price?
For now, prices are steady with not too much movement. Gold is hovering around $3,392 even as COMEX futures are surging. I reckon traders are taking their time to evaluate the whole situation and we haven’t seen any major alarm just yet.
But at the end of it all, it comes down to what the US is actually trying to do here. Is this just a technicality gone wrong or is this intentional?
The Trump administration will have to clarify this ruling letter, even if it was issued by the Customs Border Protection agency. At this point, only Trump’s words should be taken as confirmation really. But if the letter does hold, then what exactly is the US trying to do here?
For one, it might be a play to try and bump up Treasury reserves. In other words, a basic case of revaluing gold held by the US Treasury and solidifying a better position for themselves. If so, we could see spot prices explode further in keeping with the tailwinds that have underpinned gold all through the year.
I mean, it wouldn’t be too farfetched to say that this move is done to drive up demand amid choking the so-called gold “supply chain”. This would lead to prices moving up as paper shorts get burned. And once the market settles down and reprice everything at a higher level, the US then gets to work with a more golden benchmark that sees it trump above everyone else.
This article was written by Justin Low at investinglive.com.