Moneycontrol Pro Panorama | Gold rush

As the dust settles, the gold market may find itself returning to a more balanced state.

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The gold market is experiencing an unexpected twist, with demand for physical gold surging from an unusual source. US President Donald Trump's tariff threats against Europe have triggered a significant shift of gold from the UK to the US, creating a near-frenzy in the UK vaults. The Bank of England is reportedly fully booked for gold bar withdrawals, with delivery times extending from a few days to 6-8 weeks.

This sudden demand has led to a premium in the US gold market compared to London, prompting arbitrageurs to capitalise on the opportunity by opting for physical delivery rather than rolling over their trades. Fears of a potential supply crunch, should Trump announce tariffs, are driving this behaviour, as traders anticipate a price disparity between COMEX-traded gold and global markets.

The impact of this gold migration is evident in the dramatic increase of COMEX gold inventories, which have nearly doubled since late October, surging from 17.5 million troy ounces in November to 33.38 million troy ounces by early February.

This trend is not limited to London; Asian trading hubs like Dubai and Hong Kong also redirect their gold reserves to the US.

However, major players in the Indian jewellery market are feeling the repercussions of this gold exodus. In its post-earnings call, Titan Company anticipated rising gold lease rates in the coming quarters as supply dwindles. The genuine demand from the US market is expected to keep gold prices elevated, with additional pressure from a new source – Chinese insurance funds. Chinese authorities have announced a pilot project allowing certain insurance funds to invest in gold for medium- and long-term asset allocations, albeit with restrictions.

Despite the current euphoria, some analysts argue that gold prices may have outpaced fundamentals. While central bank buying is projected to exceed 1,000 tonnes in 2025 for the fourth consecutive year, and the World Gold Council reports record-high total annual gold demand of 4,974 tonnes in 2024, the surge in US demand is likely temporary.

Bernard Dahdah, a precious metals analyst at Natixis, noted that premiums in the Exchange of Futures for Physical markets reached an unprecedented $60 an ounce, far above the historical average of $1 per ounce. The scale of this gold movement, while significant, should be put into perspective. US vault holdings have increased by 433 tonnes to 1,034 tonnes, but the London market still held 8,686 tonnes as of December's end. This influx dwarfs the typical annual US physical gold demand of around 35 tonnes.

As the situation unfolds, it's expected that the market will stabilise once President Trump clarifies his stance on import tariffs. The current premiums seem disproportionate to the potential duties, and it's unlikely that Trump would target gold, an asset cherished by big investors. 

As the dust settles, the gold market may find itself returning to a more balanced state, with the current frenzy serving as a reminder of the precious metal's enduring allure in times of economic uncertainty.

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