Gold Futures Rally Fuels Market Uncertainty

Gold futures prices surged on Friday, nearing historical record highs, fueled by reports that the United States had ruled that gold bars would be subject to tariffs. This development has injected a dose of uncertainty into the global gold market, prompting traders and analysts to reassess their strategies.

Gold futures (GCc1) briefly touched $3,534 per ounce, surpassing the previous record set on April 22nd. The surge was triggered by a Financial Times report citing a July 31st letter from U.S. Customs and Border Protection indicating that 1-kilogram and 100-ounce gold bars should be classified under a customs code subject to tariffs.

Tariff Implications on Global Gold Trade

The 1-kilogram gold bar is the standard specification traded on Comex, the metal futures market used for hedging and speculation and for pricing precious metals globally. Switzerland is a major exporter of gold to the United States. The potential tariff rate could mirror the 39% tariff previously levied on certain Swiss goods by former U.S. President Donald Trump.

Carsten Fritsch, a commodities strategist at Commerzbank, stated in a note to clients that if this was not an error, it would have a “serious impact” on the gold market. “Switzerland is a major supplier of gold bars, as there are many gold refineries there that melt gold into specific bar sizes.”

He added that, due to concerns about potential future taxes on precious metals, the country exported 450 tonnes of gold to the U.S. in the first quarter, which drove up Comex gold prices and increased open interest. This pre-emptive move aimed to mitigate the impact of potential tariffs highlights the sensitivity of the gold market to policy changes.

Questions Arise About New York Futures Market Stability

The introduction of tariffs has raised questions about whether the New York futures market can continue to provide a stable and reliable trading environment for optimal price discovery. Ole Hansen, head of commodity strategy at Saxo Bank, suggests that other global centers may emerge as alternatives to New York.

Beyond tariffs, gold prices are also supported by the prospect of interest rate cuts by the Federal Reserve, concerns about stagflation in the U.S., and continued strong physical demand from China. Gold futures are up 31% this year and are on track to surpass last year's 27% gain.

Several factors contribute to gold's appeal as a safe-haven asset during times of economic uncertainty. These include:

• Geopolitical Risk: Global tensions and political instability tend to drive investors towards safe-haven assets like gold.
• Inflation Hedge: Gold is often seen as a hedge against inflation, preserving its value during periods of rising prices.
• Currency Debasement: Concerns about currency devaluation can also boost gold prices as investors seek alternatives to fiat currencies.

Potential Impact on Switzerland

Simon J. Evenett, a professor at IMD in Lausanne, believes that smelting gold in Switzerland is actually a “low value-added business activity.” He noted that Switzerland shipped $47.5 billion worth of gold to the U.S. in the first six months of this year due to concerns about gold tariffs, up from $12 billion in the second half of 2023. He added that Switzerland may now shift smelting operations to the United Arab Emirates, which faces only a 10% U.S. import duty.

Evenett concluded: “A 39% gold tariff would severely undermine this part of Swiss exports, helping to reduce the artificially inflated Swiss trade surplus with the U.S. This paves the way for the U.S. to lower tariffs in the future.” The potential relocation of gold smelting operations underscores the dynamic nature of global trade and the ability of businesses to adapt to changing regulatory landscapes.