August eighth, twenty twenty-five
《Gold’s Breakout to New Highs… Fails (for Now)》
“Gold’s breakout to new highs… fails (for now)”
COMEX gold tried to break to a new high following news that Trump would impose tariffs on gold-bar imports, but the attempt failed，In fact, the market had long been concerned that precious metals could be swept into the scope of U.S. universal import tariffs. This transatlantic arbitrage remained the main trading theme for precious metals throughout the period leading up to the end of the second quarter this year, until the precious-metals exemption emerged at the time...
Chart: After the news broke, the initial breakout attempt failed and was pushed back by selling during the session.
Taking the timeline back to the end of last year, dollar liquidity was already tight then, and gold’s calendar-spread trading required substantial balance-sheet resources. Many Many institutions needed to sell physical gold for dollars, then cover the corresponding short futures positions. In other words, when these institutions sold spot gold for dollars, they needed to close their futures shorts, but futures supply in the market was insufficient. This further drove the premium of COMEX futures over London spot prices sharply higher and led to the subsequent arbitrage shipments.
The gold-market arbitrage process basically has four steps:
1) Buy large gold bars of LBMA 400 ounces traded on the London market;
2) Melt and recast them in Switzerland into COMEX deliverable 100-ounce gold bars;
3) air-freight them to New York;
4) deliver them before the first-notice date for the 2025 2 contract.
As a result, large amounts of gold were shipped to New York. 2500 ten thousand ounces of gold that did not originally belong to the New York market were brought in and have still not left. COMEX inventories surged from 1000 ten thousand ounces to 4000 ten thousand ounces by mid-2..
Chart: Notes250418 “The Story of the Physical Gold Grab Behind New York–London Gold Deliveries and Paper Gold”
EFP was originally a short-term convenience tool (allowing buyers and sellers with genuine physical needs to transact quickly in spot markets and hedge price risk with futures). Financing and storage costs were short term, but the gold that flowed into New York became a long-term exposure with no maturity date.
This spot exposure also faces price risk and must be hedged:
Chart: Notes 250729 “Volatility Convergence”
In this transatlantic arbitrage process, European traders sought to ship gold bars to New York to capture the premium, but first they had to recast London-standard 400-ounce gold bars into the 100-ounce size required by the U.S. COMEX exchange, The key link in the arbitrage chain is Switzerland’s gold refineries.
In fact, Switzerland holds an exceptionally important position in the smooth functioning of the global gold market: if prices in London and New York diverge, Swiss refineries can melt down large bars traded in the U.K. market and recast them as smaller bars deliverable against U.S. futures contracts, and vice versa.
These precious-metal flows can cause major fluctuations in Switzerland’s trade balance. Swiss customs data show that gold exports hit a record of more than 360 hundred million dollars in the first quarter of this year, accounting for over two-thirds of Switzerland’s trade surplus with the United States. The surge in exports drove up the U.S. trade deficit with Switzerland, making Swiss gold exports a focus of trade negotiations between the two countries.
1-kilogram gold bars are the most common delivery form on the world’s largest gold-futures market, the New York Mercantile Exchange (Comex), and are also the main category of Swiss gold exports to the United States. The Swiss National Bank explained this in detail in a report earlier this year: although gold trading involves large sums, refining is a relatively small business. Switzerland has only five companies producing investment-grade gold, most with only a few hundred employees, Although the price of gold processed by refineries this year has surged to nearly 3500 dollars per ounce, refineries typically earn only a few dollars in profit when recasting gold bars. They therefore believe that the exceptionally large volume of gold exports to the United States should not be included when analyzing trade relations between the two countries，This is also one reason why the Swiss government has remained confident it can avoid steep tariffs and secure an exemption for precious metals, at least.
Traders largely held the same expectation after the second quarter: those 1-kilogram and 100-ounce gold bars could continue to receive a special exemption from Trump’s tariffs. However, according to the current confirmation from U.S. Customs and Border Protection, the tariffs now in effect do also apply to 1-kilogram and 100-ounce bars, which are not exempt as the industry initially understood.
After the announcement, gold EFP (the spread between exchange futures and spot prices) diverged sharply, and its premium to London prices at one point reached 70 to 120 dollars per ounce:
Chart: Fears of import tariffs on gold bars drove up the U.S. gold premium
Chart: Comex August/December gold spread after the announcement
One question this raises is whether CBP will treat the 400-ounce bars that dominate the London trading system in the same way, and what tariff rates major gold-producing countries will face. If they are not subject to the tariffs, these bars can be shipped directly to the United States and recast into the 1-kilogram size.
However, even so, The United States’ limited gold-refining capacity would still make the CME contract unworkable, because the spread between spot and futures prices would be constrained by capacity issues, which is good for no one.
Taking the arbitrage shipments at the beginning of the year as an example again, this In month 1, U.S. monthly gold imports surged to a high of 43 tons, as traders rushed to ship gold to the United States before possible tariffs. By comparison, data from the U.S. Geological Survey show that last year, domestic U.S. gold refineries produced an average of only 22 tons per month.
We had originally expected gold to reach new highs in month 10 or month 11, when the market would offer a safer environment to support the trade, rather than the crowded, sudden surge driven by an artificial event that we are seeing today. Every event-triggered price move creates a vacuum in prices, and the squeeze during such a vacuum is extremely dangerous.
Chart: Notes 250729 “Volatility Convergence”
Furthermore, today’s price move is attributed to U.S. tariffs on gold imports from Switzerland, but the New York market was already oversupplied with gold, and every trader had accumulated excessive inventories in the first quarter.
More importantly, the market had already become extremely sensitive after the sudden threat of copper tariffs and the subsequent sudden easing of the risk that refined copper would again be excluded; everything remains fresh in memory, from the largest daily gain on record to the largest daily loss, all still fresh in memory,
Everyone’s willingness to wade into the mess has dropped sharply.
Chart: COMEX The copper precedent is still fresh in our minds
Until there is clarity, the gold market and the precious-metals market as a whole are expected to remain highly tense.
The ideal timing we expected has not arrived; the corresponding response was already laid out in last week’s Wrap. If gold really does reach a new high under the impact of this event before month 10.....
Chart: Weekly Wrap 250803
We would choose option one.
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2025.08.08
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