Trump’s tariff threats stress London gold market

The London gold market is facing a mounting structural crisis.  

Bullion banks that lend precious metals to producers and each other moved over 200 tonnes of gold to New York in January in response to US President Donald Trump’s tariff threats, leaving the London market desperately short of physical supplies.

Dealers in London routinely borrow gold to fund customer positions. The cost of doing so, which has historically ranged from -20 basis points to +10bp, shot up to between 300bp for short-term loans and more than 1,000bp for two-week tenors.    

“The issue the gold market faced, as a result of the move of gold from Europe to America to beat the tariffs, is effectively that the supply in London, which underpins the funding of the general underlying market, is significantly reduced,” says Matt Slater, global head of precious metals trading at UBS.

That in turn has left banks in London scrambling to source enough physical gold to match their liabilities – and turned many market norms on their heads.

The gold yield curve is currently inverted, meaning it is more expensive to borrow gold for short periods of time than for longer periods. “This massively inverted yield curve is typical of a liquidity squeeze,” says Slater. “There simply isn’t enough of the physical material to meet the net funding needs of the market on any day.”

The exchange-for-physical (EFP) spread – the difference in price between spot and futures – has also swung wildly. Most spot transactions in London are hedged with futures, meaning dealers are typically short EFP spread, which has averaged around $2 historically. This shot up to as much as $60 in December and then reverted to historical levels before exploding again in January. “The EFP is more volatile than the spot price at the moment,” says Slater. “It’s unheard of.”

This is going to be a situation until the tariff/geopolitical risk premiums are squeezed out of this market

Bob Yawger, Mizuho Americas

The result is that bid/offer spreads have risen dramatically as dealers factor in the rise in volatility and funding costs into their quotes. “We’re seeing bid/offer spreads get much wider, which of course makes it far more expensive for everybody to participate in the market,” says Slater.

A second precious metals trader in London describes the current situation as simply “bonkers”.

Some, though, are less surprised by the effect the threat of tariffs has had on the market. “It basically just dislocates prices and flows,” a commodities strategist at a European bank says of tariffs. “Generally speaking, in a market that is not fungible everywhere, tariffs result in higher prices and more volatility.”

Gold rush

London has historically been the main hub for trading non-physically settled gold – including spot, forwards, swaps and options contracts – while physically settled derivatives primarily traded on CME’s Comex market in New York.

Trades in the over-the-counter London market are settled in so-called unallocated accounts – similar to nostro accounts in currency markets – that are denominated in ounces of gold.

The notional amount of gold traded in London is many multiples of the physical supply. However, the net amount in unallocated accounts after collapsing down longs and shorts must be backed by physical bars of gold that meet the London Bullion Market Association’s (LBMA) standards on everything from weight and dimensions to stamping and purity.     

“Essentially, the liquidity question in the London market after everything else is collapsed down is, are there enough freely available bars in the right place to meet these liabilities at any one time?” says Slater.

Market-makers that need to borrow gold to balance their books typically do so by trading bullion swaps, which are similar to repo contracts and can have maturities of anywhere from overnight to one week. A bullion swap is comparable to a foreign exchange swap, with gold exchanged for currency and then returned at maturity. The borrower pays the difference between the interest rate on the currency and the return on holding gold.

That interest cost – also known as the implied gold yield – has historically hovered around zero, fluctuating between -20bp and +10bp depending on demand and liquidity. In January, the implied gold yield jumped to extraordinary levels as bullion banks shifted their reserves to New York to sidestep potential tariffs, which threatened to drive up the cost of gold bars deliverable against derivatives traded at Comex by as much as 10%.

Investors quickly figured out what tariffs might mean for the price of gold in New York and piled into futures, driving up the price to all-time highs and prompting banks to move more gold across the Atlantic.

According to data from the LBMA, the amount of physical gold held in London commercial vaults, including the Bank of England, fell from around 8,775 tonnes in October 2024 to roughly 8,535 tonnes in January. Of that, only around 3,000 tonnes sits in the London clearing system, with rest sitting in the BoE’s vaults.

The true amount of gold available to fund customer positions is likely even less than that. The vast majority of the gold in the London clearing system is allocated, meaning the owner has legal title and pays a vault to store it for them. Most of that is in the hands of entities that cannot lend their holdings, such as exchange-traded funds that by mandate must maintain ownership and control of the physical gold.     

The remaining holders are demanding a steep price for their gold. “They know they have a dedicated buyer on their hands. They know that buyer, because of open interest in CME, has to basically pay up for those bars or lift the offer. So that is why you see the rate up that high versus 10% of finance cost to get that done,” says Bob Yawger, a commodities strategist in the futures division at Mizuho Americas, adding: “That is what you call a squeeze right there.”

The gold that was moved to New York is also unlikely to return to London anytime soon. Comex’s contracts call for delivery of 100-ounce gold bars, while the standard bar in the London market is 400 ounces. The gold that left London was first sent to refineries in Switzerland to be melted down and reforged to meet Comex specifications. Reversing that process would be both time consuming and expensive – and there is little incentive for banks to do so with the threat of tariffs still looming over the market.

The situation has left banks in London scrambling to get their hands on enough gold to fund customer positions. The first port of call was the BoE, which can lend some of its reserves to help alleviate the problem. But the central bank’s vault is currently so busy that it is taking anywhere from four to eight weeks to make a withdrawal.

Banks have even looked at the possibility of using scrap supply to backfill demand for gold in London.

Mizuho’s Yawger is unconvinced that a quick fix is possible in the short term, given the huge amount of political uncertainty around the Trump administration’s tariff policies.

“It’s a function of scarcity versus an all-time record high. Those bars must find their home where the open interest is at, and you would have to be an awfully generous seller not to basically squeeze the buyer for those bars,” he says. “This is going to be a situation until the tariff/geopolitical risk premiums are squeezed out of this market.”

Editing by Kris Devasabai