Investors monitoring the fluctuations in international gold prices may have noticed a rather significant shift recently: the premiums for New York gold and silver futures compared to their spot counterparts have widened considerablyThis phenomenon was particularly pronounced during London’s morning trading session on Wednesday, where the February delivery Comex gold futures reached a whopping $60 per ounce above the spot gold price, marking an unusual price discrepancy of about 2%. Additionally, the February delivery Comex silver futures posted a premium over spot silver prices that climbed to a full $1, equating to a 3% gap.

This substantial premium between futures and spot prices has sparked a variety of theories among market insiders regarding its causesA suggestion that many in the trading community have discussed is the uncertainty surrounding potential comprehensive tariff measures by the U.S

government, which could include risks associated with precious metalsWhen traders equate tariffs with importing precious metals, they begin to adjust their trading strategies to hedge against unforeseen costs.

Nicky Shiels, the head of metal strategy at MKS Pamp SA, highlighted that the volatility in pricing has been influenced by banks and funds engaging in short-covering activitiesEssentially, short positions are being liquidated as traders buy Comex futures while simultaneously selling London goldThis strategy is intended to capitalize on the price disparities between the two markets.

In standard practice, New York gold futures typically track the prices of spot gold closelyHowever, many banks and traders often utilize a method called Exchange for Physicals (EFP) to capitalize on arbitrage opportunities between these marketsEFP transactions occur between the physical and futures markets, allowing sellers in the spot market to hedge their positions by entering into private agreements with buyers in the futures market

• China Issues Dollar Bonds in Global Market
• U.S. Services PMI Hits Fastest Pace in Over Three Years
• Salary Required for High-End Cycling
• Breakfast Insights FM-Radio | December 17, 2024
• German 10-Year Bond Yields End Five-Day Surge

In these arrangements, sellers transfer actual ownership of the commodity to futures market players, who in turn assign their futures position back to the seller.

John Reade, a strategist at the World Gold Council, mentioned that if market participants perceive even a slight chance that tariffs will impact imports of gold, silver, and copper, then it makes sense for them to cover any EFP short positionsHe pointed out that while these maneuvers might incur some costs upfront, the potential losses of not covering them could be far more substantial.

Reade emphasized the risks associated with a potential 10% tariff regime, under which traders could see losses approaching $300 per ounce of gold, a risk that far exceeds potential future profit margins if precious metals were to be exempted from such tariffs.

This situation resembles a previous incident in April 2020, at the onset of the global pandemic, when the gap between gold futures and spot prices expanded alarmingly

During that period, worries over the timely transportation of gold to New York for futures settlement panicked traders, causing the premium to soar to over $70, the highest in 40 yearsHowever, the circumstances are notably different today; there are no transportation issues reported for physical gold bars between New York and London, as the movement of gold typically occurs via air transport which is generally reliable.

According to data provided by the Chicago Mercantile Exchange, the total inventory of Comex gold was approximately 8.1 million ounces as of TuesdayA closer analysis of inventory levels since December reveals a steadiness lacking in abnormal fluctuationsIn the lead-up to the wide discrepancies noted in 2020, the levels of gold inventory were noticeably lower compared to the presentOver the years, traders have gradually navigated the challenges posed by supply chain disruptions, resulting in a significant increase in gold inventories as operations resumed and stabilized.

In summary, while the widening premiums between New York futures and London physical gold are raising eyebrows and igniting discussions among investors, they reflect a layered interplay of market dynamics