Will Comex gold face import tariffs?

Rumours that Trump will introduce 10% tariffs on precious metals are said to be driving gold higher. This report gives a more likely explanation.

For the last two weeks before and after President Trump’s inauguration on 20 January, gold has recovered to almost new highs in dollars. In European trade this morning, gold was trading at $2774, up $73 on the week and silver was $30.85, up 53 cents for a gold/silver ratio of nearly 90 times. Comex volumes were generally healthy, with the exception of high volumes on Tuesday following Monday’s closure for Inauguration Day.

Comex Open Interest in gold has increased sharply towards overbought levels, while silver’s OI has only just begun to reflect more buying as shown in our next two charts respectively.

It is worth showing these charts together to demonstrate how gold’s OI has soared, while silver’s increase has been more subdued. The question which we need to address is what has been driving gold and not silver.

The story coming out of the London market is that US futures’ demand reflects fears that Trump will extend general import tariffs of 10% to precious metals, hitting gold. Silver is thought to escape tariffs because it is in supply deficit for the US. This might explain why gold has soared while silver has not. Furthermore, significant and fluctuating premiums have risen on Comex gold contract values over London spot, leading to a physical arbitrage whereby gold has been air-freighted out of London to New York through the exchange-for-physical facility (EFP).

There is bound to be something in this factor as traders respond to possibilities. But perhaps it’s little more than a conventional explanation for the increase in effective lease rates through the EFP channel. But rumours are rumours, not facts. Is there another explanation?

We cannot ignore the massive increase in Comex gold stands-for-delivery, and to a lesser extent silver. As of last night, a total of 43.5 tonnes had stood for delivery in January’s 15 trading sessions so far. That’s an annualised rate of 725 tonnes, an enormous quantity, about 20% of annual world mining output. For silver, it’s 175.4 tonnes so far, significant but not so great in terms of global supply. While not dismissing rumours of tariffs on gold imports entirely, the increasing use of Comex futures contracts as a means of obtaining physical suggests a valid alternative explanation.

Bearing in mind the leverage of futures over physical, at some point the drainage of physical liquidity backing short positions is bound to have an impact, creating an urgent need for replacement bullion. Hence the panic raids through EFPs on London’s liquidity, driving up effective lease rates. The drive in gold lease rates on Comex spiking to over 10% is reminiscent of a different context — the scramble of liquidity in September 2019, when repo rates soared, and the Fed had to intervene providing liquidity to a distressed banking system.

At its root the current situation in gold futures has similarities to that repo crisis, being a lack of physical liquidity to back highly leveraged derivative positions. Nearly all the world’s newly refined gold is pre-ordered by very large buyers, leaving the rest of us scrambling for what remains. It drives buyers into buying futures with the express objective of taking delivery. It results in growing strains in the market, leading potentially to counterparty failures.

To illustrate this point, the next chart shows the estimated monetary position of Comex Swaps today.

Note how gross and net shorts are at record levels ($82.7bn and $74.4bn respectively). It is a very uncomfortable squeeze on the establishment, with the prospect of intensifying even more.