What Just Happened? Part 1: Gold and Silver Fall Hard

Gold and silver are being pulled down by a general equities bear market this morning. That’s not surprising, but the details are interesting. Some background:

Rush to get gold to the U.S. halts abruptly with tariff exemption

(Bloomberg) - A massive arbitrage trade that has drawn tens of billions of dollars’ worth of gold and silver to the U.S. came to an abrupt halt with Wednesday’s announcement that precious metals would be exempt from Donald Trump’s sweeping tariffs.

For several months, prices in New York have traded at large and unusual premiums to global benchmarks as traders weighed the risk that precious metals could be caught up in tariffs. The differential created an incentive for banks and traders to load planes and ships with so much bullion that it distorted U.S. trade data in the process.

On Thursday, U.S. premiums for precious metals tumbled after a list of exemptions from the tariffs included gold, silver, platinum and palladium. The difference between front-month Comex gold and spot gold in London dropped to $23 an ounce, from over $62 on Wednesday. For silver, the differential — known by precious metals trader as the “exchange for physical” or EFP — tumbled from more than $1 an ounce to just 24 cents.

“Yesterday’s announcement effectively puts an end to the massive flow of precious metals into the US over the last few months as the EFPs collapse,” said Anant Jatia, chief investment officer at Greenland Investment Management, a hedge fund specializing in commodity arbitrage trading.

US precious metals markets never fully priced in major tariffs, but the mere risk of them being imposed caused traders to cover short positions in the US markets, driving a persistent differential. That, in turn, created an incentive to ship physical metal to the US.

U..S inventories of precious metals have surged to the highest levels on record, with gold stocks up 26.5 million ounces since the end of November and silver up 174.6 million ounces — inflows that are collectively worth over $80 billion at current prices.

Imports of gold helped drive the U.S. trade deficit to a record in January, prompting economists to exclude the precious metal from their calculations. Inflows of gold to the US are likely to have remained high in February and March, and some may continue in April thanks to trades that were booked when the arbitrage was still open.

Does This Matter in the Long Run?

Not really. Debt is still soaring, political systems are still descending into chaos, trust in major institutions continues to erode, and strange, inexplicable events keep occurring. An equities bear market only adds to the urgency with which the world’s major governments are choosing inflation as a form of damage control.

So don’t be spooked by market squiggles. Continue to add to high-quality precious metals stocks recommended in our Portfolio via low-ball bids, dollar cost averaging, and put writing. Even crazier times are coming.