(Bloomberg) — The risk that 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.
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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% on incoming goods from all countries.
Now, a spike in so-called lease rates in London this 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 this week they’ve surged to historic levels, with profits on one-month lease rates exceeding 3.5% on an annualized 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 JP Morgan Chase & Co., the world’s top bullion dealer. “There seems to be a scarcity of available stocks in both gold and silver.”
Bullion-dealing banks like 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 spiraling even higher.
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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 $40 more, you’re going to do that,” said Max Layton, global head of commodities research at Citigroup Inc. “So of course there’s a scramble.”
–With assistance from Sybilla Gross and Jack Farchy.
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