Are Tariff Worries Setting Up a Gold Squeeze?

We could be setting up for a significant squeeze in the gold and silver markets

Bullion.Directory precious metals analysis 20 January, 2025
By Mike Maharrey
Journalist, analyst and author at Money Metals Exchange

Last week, Money Metals reported uncertainty in the gold and silver markets due to worries about tariffs on precious metals entering the United States. We’re seeing signs that concern is growing, creating an interesting dynamic in the London precious metals market.

Owners of gold in London vaults can loan their metal on a short-term basis. Normally, the return on a lease is close to zero. But last week, lease rates suddenly surged to over 3.5 percent on an annualized basis. The last time lease rates rose to this level was 2002.

This surge in lease rates signals increasing demand for London gold in London vaults.

As Bloomberg explained it, “A spike in so-called lease rates in London this week signals that an increasingly frenetic global hunt for bullion is underway as major dealers seek to shift metal to the U.S. before any tariffs are imposed.”

We’re seeing similar dynamics in the silver market, and according to Bloomberg, “some analysts and traders warn that there may not be enough freely available metal to meet dealers’ needs.”

A former precious metals trader at JPMorgan told Bloomberg, “The markets are in total dislocation.”

“There seems to be a scarcity of available stocks in both gold and silver.”

This is because metal is shifting to the U.S. to get ahead of any potential tariffs.

Gold and Silver Movements Due to Price Disparities

With tariff worries, the prices of gold and silver traded on the New York futures market have surged above global markets. This is incentivizing the movement of metal into the United States.

As we reported last week, “Traders are buying metal in London, simultaneously selling in the NY futures market (and pocketing a tidy profit), withdrawing the metal from London vaults, and transporting the metal to the U.S. to deliver onto the exchange to close out the futures position.”

Under normal market conditions, big banks that deal in bullion such as JPMorgan and HSBC, along with hedge funds and high-frequency trading firms, serve to balance prices between New York and London. For instance, when prices rise on the New York COMEX, traders sell those futures contracts and buy lower-priced London futures, earning a small profit. These “arbitrage trades” tend to hold the two trading centers roughly in balance.

But as Bloomberg explained, “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.”

Meanwhile, big banks can get out of arbitrage trades by physically moving metal between the trading hubs. That appears to be happening today.

The last time we saw this kind of market displacement was in the early days of the pandemic.

Citigroup head of commodities research Max Layton explained it this way to Bloomberg:

“If you’re a trader and you can find someone who’s willing to sell you outside the U.S. 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. So of course there’s a scramble.”

The problem here is obvious. As gold moves out of London into New York, at some point, the gold and silver holdings across the pond will be depleted, creating a squeeze, as we explained last week.

“This dynamic is having the effect of draining London vaults of gold and silver at an unusually fast rate –and at some point, these lower levels of vaulted metal in London could create price dislocations in that major market too. Those who have short positions in the New York market are in the process of getting squeezed, especially if they are having trouble getting their hands on physical metal to deliver into their short positions. Or get it into the right form.”

A Potential Silver Squeeze

This type of squeeze is likely to show up in the silver market first due to its smaller size, and as Bloomberg pointed out, we’re starting to see the dynamics lining up for a silver squeeze that could cause the prices to spike.

TD Securities senior strategist Daniel Ghali told Bloomberg that the threat of tariffs is already “accelerating the timeline to depletion” of the free-floating silver stock in London. He projects a significant supply crunch this year despite a slowdown in demand growth.

Keep in mind that Ghali’s projection of “slowing demand growth” is coming off record industrial demand, and we’ve already seen market deficits for four straight years.

Based on projections, industrial silver demand set a record last year of over 700 million ounces. The combination of surging demand and the modest increase in supply will result in a projected physical deficit in 2024 for the fourth consecutive year. At 182 million ounces, this year’s deficit is little changed from 2023 and still elevated by historical standards.

In other words, even if demand slows somewhat in 2025, we’re still looking at a significant silver offtake.

Since mid-December, COMEX silver stocks have increased by more than 22 million ounces as London stocks have reached critically low levels. Adding to the problem, tepid mine output over the last four years has pressured above-ground silver stocks.

Keep in mind that silver stocks in London are also tied to ETFs and over-the-counter trading. Based on number-crunching by Bloomberg, only 50 million ounces of silver remained as of the end of December before withdrawals of readily available silver dip below the average trading volume.

Ghali called this a “critically low cushion” and said it creates a compelling setup for “explosive” price peaks to unlock inventories from unconventional sources.

It remains unclear whether tariffs will apply to gold and silver, but this is definitely a dynamic to keep your eyes on.

This article was originally published here

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