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 market. This 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 prices. They 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 play. Central 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 period. Together 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 urgent. The 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) spread. If 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 differential. This 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. 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 trading. A 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 rates. Currently, 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 COMEX. Should 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 junction. The 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. However, this route is quickly approaching saturation.

These clearing banks are mandated to maintain a sufficient amount of London gold reserves to ensure liquidity; however, they appear to be grappling with inadequate supplies to fulfill this requirement. Counterparty risks among members of the London Bullion Market Association—including market makers, clearing houses, and roughly 50 trading and brokerage firms—are on the rise.

The market is also witnessing transactions involving "gold claims"—essentially electronic gold notes, which are currently being traded at a discount due to their inability to be redeemed for physical gold at will. The borrowing rates for GLD (the world’s largest gold ETF) spiked dramatically from 2.44% to 6.29% within just hours, underscoring the pervasive anxiety gripping the market.

Manly goes on to sound a stark warning:

“This indicates that the market is in complete panic… There is no gold underpinning the London market!”

Yet, in spite of these turbulent conditions, Goldman Sachs remains steadfast in its $3,000 per ounce target for gold by the second quarter of 2026. The firm posits that ongoing policy uncertainty emanating from the United States will likely perpetuate a hedging demand from central banks and investors alike, thereby providing an upward risk to their projected price target.

While current market positions are notably high, arguably decreasing the attractiveness of entry points for short-term investors, Goldman Sachs continues to advocate for a long-term commitment to gold holdings. The firm promotes sustained investment strategies in gold, especially for those looking to hedge against risks posed by U.S. policies.