Spot gold trades above $2800

A Comex exchange-for-physical crisis is in progress, repeating the disruption during covid. The media story blames Trump’s potential tariffs. But is this the real reason gold is hitting new highs?

Gold and silver rose further this week, driven by continuing premiums on Comex futures over London spot. In European trading this morning, spot gold was $2794, up a further $24 from last Friday’s close. And silver was $31.60, up $1.25. The gold/silver ratio fell from 91.7 on Monday morning to 88.4. While silver is still well below recent highs, it has outperformed gold since the New Year as our headline chart shows.

The premiums on Comex futures are dragging the spot price higher and have generated a massive arbitrage, whereby gold futures are being sold through the exchange-for-physical facility. Bullion to settle is being airfreighted to New York from London. Since 1 January, Comex warehouse gold stocks have risen over 282 tonnes, and in addition it is certain that there have been inflows into JPMorgan’s and HSBC’s private vaults in New York.

Naturally, these flows have drained LBMA vaults of their liquidity, even forcing withdrawals from the Bank of England’s Threadneedle Street vault leading to a wait for delivery of up to eight weeks, according to a Financial Times article on Thursday. The last time a dislocation of this sort occurred was during the covid crisis, when gold rose from $1460 to $2073, then an all-time high, a rise of 42%.

So what’s driving this new exchange-for-physical crisis? Are stories that Trump might bring in tariffs on gold and silver really credible?

Let’s deal with the tariff story first. Trump has never said he would implement tariffs on imported commodities, let alone precious metals. His tariff policies are protectionism aimed at protecting US manufacturers from foreign competition and to encourage onshoring. Threats of high tariffs against Mexico and Canada, large exporters of silver and gold respectively, are always in that context.

If the tariff story has an involvement, it will have simply triggered an inherently unstable situation to destabilise. That was almost certainly going to happen at some time anyway.

Increasingly, mine and scrap supplies are bypassing western markets and going to central banks, sovereign wealth funds, and savings-driven Asians leaving western bullion markets short.

To understand the scale of the problem one has to step back from current markets and put it in a longer-term context. Since the end of Bretton Woods in 1971, the US Treasury embarked on a policy of anti-gold propaganda and price suppression to enable the dollar to be regarded as money instead of credit in gold’s place. Because so few people actually understand the difference between money and credit — and that includes the entire macroeconomic establishment of highly qualified economists — the mighty US Treasury convinced everyone. It is that story which is now unravelling with dramatic consequences.

It started with ex-communist states accumulating gold (China and Russia in particular) who were never exposed to Keynesian economics, helping to drive prices up from under $300 per ounce in 2002, particularly when Chinese nationals were permitted to own gold from then onwards. More recently, Asian central banks in the Sino-Russian sphere of influence began to accumulate bullion for economic or geopolitical reasons. This has now spread to central banks in the western sphere of influence, notably Poland’s. What we don’t see is the extent to which associated sovereign wealth funds have and continue to accumulate bullion, but the figures are likely to be significant.

What it all amounts to is a growing global disillusionment with the US Treasury’s long-standing anti-gold propaganda and increasing concerns over mounting credit risks. Whether they fully realise it or not, these sophisticated buyers of gold are turning their back on credit, which includes currencies.

The result is that in the last 25 years, currency values have progressively fallen measured in real money, which despite US Treasury propaganda remains legal money without counterparty risk in everyone’s common law. The log-scale chart below shows the extent of divergence between the value of real money and fiat currencies over just this quarter century:

The yen has lost 93% of its 2000-value, the dollar and euro about 90%, and sterling 92% with the users of these currencies, including savers, unaware of what’s happening to their medium of exchange. And now this collapse is accelerating, with an average loss of over 25% in 2024 alone.

We can talk about bulls and bears in financial markets for ever. But to focus entirely upon the relationship between nose and grindstone blinds us to the true and massive forces driving the relationship between money and credit, condemning the latter towards oblivion.