ROSS NORMAN – Tariffs on Swiss Gold Is Like Adding Sand Into Engine Oil
It could be argued that the gold market is one of the most efficient in the world. Well .. it has been.
Bid/offer spreads in the professional market are super-tight at about 30 cents on a $3400 price, gold can be purchased in places like India with just a 1.5% premium over the spot price to reflect workmanship and fashioning into jewellery, while I have witnessed women selling gold in a river in West Africa and securing 98% of the value for their unrefined gold (not always). While gold is yet to fully and universally embrace the efficiency gains that the digital world brings … it has always been a really tight market. And that's great for investors as it reduces trade friction.
Take gold refining … the cost of converting unrefined primary gold (typically 88% gold, 9% silver plus other metals), fresh from a mine, upgrading the purity to 99.5+% or 99.99%, and then and delivering into the professional metal can be done for less than 50 cents on a $3400 price. Bargain.
For retail investors in the UK, gold can be bought (without VAT or capital gains tax) for a premium of about 3% and sold back at the spot price – and that compares to about 8% for one of the countries favorite bets ... buy-to-let properties. Added to which gold is more liquid (4 minutes to convert a gold bar into cash … likely 4 months for a property) … and then there's price performance - gold has outperformed the average property by a factor of about 4 since 2000 (at about 10% per annum compounded) … off my high horse now … and advert for gold over.
By likely imposing 39% tariffs on Swiss kilobars is akin to pouring sand into an otherwise well functioning engine. I say “likely” … the possibility remains that this is an error. It has been reported that the US Customs and Border Protection Agency places gold kilobars into a category which classifies them as “semi-manufactured” rather than “unwrought”. “Semi-manufactured” essentially means the gold has undergone some preliminary processing or shaping but not reached its final product stage, while “unwrought” means it is still in its natural state after initial refining … it could strongly be argued for either definition.
In short, this pivots around codes - ordinary bullion and dore (raw or unwrought gold) is classified as 7108.12.10 and is typically non-tariffed, but minted or shaped gold bars (especially kilo and 100-ounce forms) are now classified as 7108.13.5500 and can be subject to tariffs under current U.S. Rules.
So here's the thing … this tariff would apply to ALL kilobar and 100 ounce bars – imported - so a minimum of 10% (lowest tariff rate) and up to 39% … Switzerland. So gold loco New York (about 1000 tonnes) has just been re-priced upwards by at least $100 – that's to say someone has just made about $3.2 billion dollars overnight. Not bad. And this is not just a Swiss story … this has put sand into the global bullion market.
The US is the principal gold futures market (London is a spot market – the here and now) and embedded within the futures contract is the option to take delivery – not normally requested – but if you are short the futures contract and you are asked to deliver then you have quite an issue. The price differential between the London price and the New York price is currently over $100 per ounce but likely this could arguably go to several hundred dollars per ounce ($800 to grab a number out of thin air). Normally the difference (referred to as the EFP) reflects the value of time plus some modest premium for the kilobars. As you can see below the differential has ballooned.
But we have been here before.
During COVID the gold supply chain was 'challenged' owing to delivery difficulties. As a result vast fotunes were made and lost. With a little luck banks and traders are better positioned or hedged against such an eventuality. But the tide is going out so we shall see who is wearing trunks.
Put just a little sand into the oil of an engine and the effect is immediate and damaging. Deeply efficient engines suffer most and its the the flip side to an otherwise smooth functioning machine.
How does this play out for gold flows ? … well firstly CME (the US futures market) has a monumental issue to resolve … forgive the hyperbole … its justified. What are they going to do to protect their market … thought … the Chinese are increasing their activity in this space.
The first thing is to get confirmation and clarity from the US Customs and Border Protection Agency on whether gold falls under the beautifully named code 7108.13.5500 or 7108.12.10 ? The second thing is to see what CME Group in New York are going to do about this roadblock.
Will spot prices run higher ? Well likely yes, but perhaps less than you might expect – non-Swiss bars will go for a hefty premium if you can find them while Swiss bars should go for an offsetting discount.
Its hard to see this as a win for gold bugs (unless you are the sort of person that likes to watch car crashes), but for me it undercores the vulnerabilities inherent in both the bullion market and more broadly, global trade. Gold feeds on uncertainty and we have come to a pretty pass when its gold itself that is the cause of that uncertainty. A self-referential paradox.
Ross Norman
CEO
Metals Daily Ltd
www.metalsdaily.com
ross@metalsdaily.com