In a remarkable turn of events, the price of gold surged to an unprecedented level of $2,885 per ounce last Friday, marking a historic high in the commodity marketThis spike in value comes on the heels of mounting concerns surrounding tariffs, pushing market positions to the 91st percentile—the highest since 2014. Such developments resonate with Goldman Sachs's projection that tariff-related hedging could elevate gold prices by as much as 7%.

The latest report from Goldman Sachs' commodity research team highlights that if the uncertainties surrounding tariffs diminish and market positions normalize, one could anticipate a modest tactical pullback in gold pricesThey anticipate a gradual correction through the second quarter of 2026; however, should speculative positions abruptly revert to long-term averages, a decline to $2,650 per ounce (a drop of about 7%) might be likely.

Conversely, supportive factors are at playCentral banks across the globe continue to acquire gold—forecasted to push up prices by 11% by the second quarter of 2026. Additionally, a steady increase in ETF holdings is predicted to contribute another 4% growth during the same periodTogether with expectations of Federal Reserve interest rate cuts, these elements reinforce Goldman Sachs's ambitious price target of $3,000 per ounce of gold by mid-2026.

However, the underlying issues plaguing the precious metals market have grown more urgentThe disparity in pricing—specifically between New York's COMEX futures and London spot gold prices—has widened significantly, manifested in the Exchange-for-Physical (EFP) spreadIf the COMEX futures surpass the London spot prices, arbitrage traders typically purchase cheaper gold in London, converting 400-ounce bars into 100-ounce bars before shipping them to New York for delivery on COMEX, hoping to profit from this price differentialThis arbitrage mechanism has generally kept gold prices synchronized between the two significant trading hubs.

Yet, fears surrounding a potential 10% tariff imposed by the U.S. on gold imports have recently amplified the EFP spread

Advertisements

Transporting gold into the U.S. incurs various costs, notably refining gold through Switzerland to meet COMEX delivery standards, which directly affect the profit margins from such tradingA potential tariff could substantially escalate these transportation costs, stripping away the profitability of arbitrage operations.

In light of these concerns, traders have begun shifting gold into the United States, resulting in a notable shortage in the London market and surging gold leasing ratesCurrently, the one-month leasing rate for gold—a crucial indicator of physical demand—has hit a historic high, as market participants race to secure physical gold to capitalize on the EFP price difference.

This exodus into the U.S. has caused inventories at the COMEX exchange to skyrocket by a staggering 64%, equating to approximately $37 billion, as traders deliver physical gold to hedge against short positions on COMEXShould U.S. tariffs indeed become reality, analysts at ZeroHedge project that the spread between COMEX and London gold prices could temporarily soar to nearly 10% before eventually stabilizing in the 0-10% range, contingent upon supply and demand dynamics within both markets.

While Goldman Sachs holds that the precious metals will remain untaxed—though they predict industrial metals will face tariffs—there remains a persistent risk premium associated with tariffs evident in the EFP curve.

Similar dynamics plague the silver market, where the one-month leasing rate has also reached record highs, contributing to a backwardation scenario in futures trading even with SOFR rates soaring above 4%. Traders are thus competing vigorously to purchase silver in a bid to leverage arbitrage opportunities.

Ronan Manly from Bullion Brief notes that the market is currently at a critical junctionThe London bullion clearing banks have exhausted their inventories of deliverable gold and are now seeking to borrow gold through the Bank of England's lending market

Advertisements

Advertisements

Advertisements

Advertisements