Gold Shortage: The Crisis in London & New York!

Summary

A significant surge in gold shipments from London to the U.S. has raised questions about the future of the gold market. Triggered by concerns over potential tariffs and arbitrage opportunities, this shift has strained London’s bullion reserves and affected gold lease rates, contributing to a rise in gold prices. The move highlights the ongoing importance of gold as a safe haven asset amidst geopolitical uncertainty and financial shifts. While this could result in higher gold prices and supply disruptions, the fundamental value of gold remains intact, reinforcing its status as a stable investment option.

Takeaways

• 😀 There has been a surge in gold shipments from London to New York, with nearly 400 metric tons moved since November's US election.
• 😀 The fear of potential tariffs on gold imports into the US is driving this surge in shipments.
• 😀 Gold future prices in New York have been higher than those in London, incentivizing traders to take advantage of the price differential through arbitrage.
• 😀 Similar gold stockpiling happened during the COVID-19 pandemic due to concerns over shipments and lockdowns, but this shift is now being driven by different factors.
• 😀 US gold futures trading is primarily cash-settled, but now dealers are requesting physical delivery, which is rare and adding pressure to the gold market.
• 😀 The price of borrowing gold in London has risen sharply, from under 0.5% to around 12%, leading to increased costs and forcing short sellers to unwind their positions.
• 😀 The increase in gold prices has led to significant price spikes, breaching key resistance levels like $2,725 an ounce, approaching all-time highs.
• 😀 Even though President Trump hasn’t directly proposed tariffs on precious metals, the fear of such tariffs is affecting market behavior and leading to a shift in gold to New York.
• 😀 The Bank of England is struggling to manage the surge in gold borrowing requests, causing the available gold for over-the-counter (OTC) trading to fall significantly.
• 😀 Over the last two months, 12.2 million troy ounces of gold have been delivered to COMEX-approved warehouses, raising stock levels by 70% and prompting scrutiny from the British Parliament.

Q & A

What is the primary reason behind the surge in gold shipments from London to the U.S.?

The primary reason for the surge is concerns over potential tariffs on gold imports to the U.S., along with price differentials between gold futures in New York and the cash market in London.

How have gold futures in New York been influencing the gold market?

Gold futures in New York have been priced higher than the spot market in London, creating an arbitrage opportunity where traders can profit by shipping gold from London to New York.

What impact has the shift in gold flows had on London’s gold market?

The shift has put significant strain on London's gold leasing system, causing a rise in borrowing costs and increasing pressure on London vaults and the liquidity of gold.

How have gold lease rates been affected by the surge in demand for physical gold?

Gold lease rates, which are typically below 0.5%, spiked to nearly 12%, making borrowing gold expensive and causing short sellers to unwind their positions.

What role does the Bank of England play in the global gold market, and how is it being affected by these changes?

The Bank of England is the central hub for gold trading, warehousing, and price discovery. However, it is struggling to keep up with the surge in demand for gold storage and borrowing, leading to increased delays and difficulties in managing the market.

What are the potential long-term implications of these changes in gold flows?

The long-term implications could include a major revaluation of gold and silver, driven by a devaluation of fiat currencies and bonds, as well as shifting gold storage and trading practices.

Has the U.S. government specifically proposed tariffs on gold imports?

No, President Trump has not specifically mentioned tariffs on precious metals, but the risk of such measures has been enough to drive the increased movement of gold to the U.S.

What is meant by 'arbitrage' in the context of the gold market?

Arbitrage refers to the practice of taking advantage of price differences between two markets—in this case, the higher gold futures prices in New York compared to the lower spot prices in London, prompting traders to shift gold across the Atlantic.

What is the significance of the gold surge on the COMEX exchange?

The surge in gold deliveries to COMEX-approved warehouses has raised stock levels by 70%, marking the highest gold reserves since August 2022, which impacts future market pricing and liquidity.

Why is gold considered a stable investment amid uncertainty?

Gold is considered a stable investment because its fundamental value remains intact, and it serves as a safe haven asset, particularly during times of political or financial instability, unlike fiat currencies or bonds.