Disruptions in the Gold Market Due to Surprise U.S. Tariffs

SadaNews - The global gold market relies on a network of banks, refining companies, and shipping lines that can move gold bullion between major trading hubs at a moment's notice in pursuit of the highest prices. However, on Friday, a shocking U.S. decision indicating that the yellow metal would be subjected to tariffs led to chaos in this system.

The decision, seemingly issued by the U.S. Customs and Border Protection agency - which was secretly announced in a letter to a Swiss refinery on July 31 and published on Friday - caused a sharp surge in gold futures prices in New York to record levels, with informed sources warning that the tariffs would have dire consequences for the market. Then, just as quickly, prices fell after the Trump administration indicated that imports of gold bullion would ultimately be exempt from tariffs.

Market Volatility Amid Trump's Trade War

This was the latest instance of sharp market fluctuations due to President Trump's trade war, affecting equities, raw materials, or finished products.

Gold bullion is typically treated as a financial instrument rather than a physical product, and imposing tariffs on it would have severe consequences to the extent that many traders argued on Friday that the decision must have been a mistake.

"The problem is that the government didn't look beyond the physical form and didn't realize that this instrument is actually gold," according to Robert Gottlieb, a former precious metals trader and managing director at J.P. Morgan Chase.

A complex and sometimes fragile system for producing and transporting gold bullion forms the basis of the global market for this metal, including futures exchanges in New York and Shanghai, as well as a massive over-the-counter market overseen by London banks. It is also relied upon by major consumer hubs in Mumbai, Dubai, and Hong Kong.

There is more than $1.1 trillion of gold bullion stored in vaults to support trading in New York and London alone, with a significant portion held by major traders, including J.P. Morgan and HSBC Holdings.

Refineries Play a Vital Role in the Flow of Gold

Refineries in Switzerland play a crucial role in facilitating the flow of gold between London and New York. A trade group representing them stated on Friday that the apparent tariffs would render any future shipments to the U.S. unviable. Asian refineries temporarily halted sales destined for the United States. At the heart of the disruptions in New York, observers warned that the tariffs would present a significant threat to the gold futures market itself.

"The disbelief is not just about losing several billion dollars overnight. The issue is that we will not be in a good position when a disruption occurs. When things fall apart, we suffer heavy losses," said Ross Norman, a veteran expert who has worked in the field for four decades and now runs the Metals Daily website for pricing and analysis.

This disruption was immediately reflected in the price differential between the Comex exchange under the CME Group in New York and the global benchmark price set in London. Futures contracts in New York set a new record exceeding $3,530 per ounce on Friday, while the London market fell by more than $100.

Trump's Tariffs Present a Dilemma

This was a record gap, but the 3% price differential would not be enough to offset the apparent costs of import tariffs, which would vary from country to country under Trump's reciprocal tariff system.

Typically, if New York prices rose sufficiently, large-sized bullion traded in London is melted in Switzerland and re-cast into smaller bars, weighing one kilogram (2.2 pounds), ready for delivery via the Comex exchange. However, with Switzerland facing a reciprocal tariff of 39%, Comex prices would need to rise to about $4,700 per ounce for shipments to be viable.

To bridge this gap, American buyers might look to other major suppliers, including Canada and Mexico. But Trump has threatened to impose strict tariffs on those countries as well.

Severe Consequences for Global Gold Trade

Unlike gold mining companies, independent refineries rely on very slim profit margins. The Swiss trade group warned on Friday that their exclusion from such an important market would have dire consequences for global gold trade.

The hope - which investors, traders, banks, and logistics companies had after being shocked by the U.S. decision - is that the White House will step back from the brink. And it may indeed do so: the administration intends to issue an executive order clarifying what it described as misinformation regarding gold tariffs, according to an official.

Darryl Kong, head of commodities and portfolio manager at DWS Group, said: "Day by day, we learn more about the new rules that could drastically change the landscape of every commodity." He added: "Negotiations might lead to more changes in the coming days."