Earlier this year, the gold market experienced some unusual activity. When President Trump took office, he warned that the US would impose higher tariffs on many imported goods. At the time, there was speculation that gold, silver, and platinum might be included and importers would have to pay tariffs to bring metal into the country. This led to a rush to move gold from London to New York before any tariffs could be applied.
London vaults saw a spike in requests to move 400oz gold bars, which were then sent to Switzerland to be melted down into the smaller 1kg or 100oz sizes preferred by the New York COMEX market. This sudden movement of metal caused gold prices on the New York COMEX market to rise, creating a significant price gap between the London and New York markets. Precious metal leasing rates also surged, making it more expensive for mints and refineries to fund their gold, silver and platinum inventories.
Eventually, the market calmed when it appeared that bullion bars that met the COMEX requirements would be exempt from tariffs. However, on 7th August the Financial Times reported, that to the surprise of most in the gold market, the US Customs and Border Protection agency ruled that imports of cast gold bars should use a tariff classification code that is subject to tariffs. This means that the 1kg and 100oz bars used by the COMEX market could now face tariffs.
London and New York are the world’s two main gold trading hubs, but they operate using different physical bar sizes. To send gold from London to New York, the metal often needs to be re-melted into smaller bars, and Switzerland is a major hub for this activity. Over the past year, Switzerland exported $61.5bn of gold to the US. On 1 August, the US introduced new tariffs on goods from several countries with Switzerland facing the highest rate in Europe at 39%. This puts Swiss gold exports to the US in the same tariff bracket as exports from countries like Syria and Myanmar. Clearly, a 39% tariff applied to gold bullion could significantly impact the overall cost of importing precious metals from Switzerland into the US.
What This Could Mean for Investors
The Financial Times’ revelation has fuelled a lot of debate about where gold prices might go next and what this means for the market. While the situation could lead to volatility, it’s important to remain rational and focus on the facts. The US government could change its position at any time, which might ease or increase market pressures.
Here are some points to consider that might help you make sense of any speculation you see in the press or online:
1) Alternative sources of gold – Switzerland isn’t the only country producing COMEX-approved bars. Refiners in lots of other countries, including Canada, Japan, Australia, and the US can also make them. The key question is whether these refiners have the capacity to quickly and efficiently meet demand if buyers shift away from Switzerland. Many of these countries also face tariffs, though at different rates. Some of these refiners may have to choose between making different kinds of products e.g. COMEX cast bars at relatively low margins or other products at higher margins.
2) Possible demand shifts – If tariffs make COMEX gold more expensive, some demand could move to other markets, like gold ETFs or the London over-the-counter (OTC) market. A sudden spike in demand could raise gold prices and push up leasing rates, which could in turn make physical gold products more expensive. Any such shift in demand patterns remains to be seen and would not be without its challenges.
3) Speculative theories – Some speculate that the US might benefit from higher gold prices if it decides to revalue its official gold reserves. US gold reserves have long been officially valued at just $42.22 per troy ounce, significantly below the current market value. Revaluing their gold reserves at the market rate could boost its balance sheet by over $870bn, against which the US may be able to borrow (and spend). There is no evidence that the US government plans to do this, and the US Treasury has publicly dismissed the idea.
The Bottom Line
The situation is still unfolding. There is potential for significant price volatility, but also for the policy to change quickly. For now, it’s worth staying informed and remembering that gold remains a globally traded asset, and one that many investors view as a long-term store of value, particularly during periods of uncertainty.
