Gold Bulls Hope to Ride Tariff Turmoil to New Highs. They Could be Right.

U.S. Customs and Border Protection officials are reportedly set to charge import tariffs on gold bullion. (Getty Images)

Gold futures prices caught fire in overnight trading, and look set to extend their gains in early Friday dealing, following a report that suggested bullion bars could be subject to U.S. import tariffs.

The Financial Times said the U.S. Customs and Border Protection has sent letters clarifying that one-kilogram bars, as well as 100-ounce bars, would face levies tied to President Donald Trump’s tariff arrangement with Switzerland. Traders had expected precious metals would be exempt from the new tariffs.

The White House and Customs and Border Protection didn’t immediately respond to a request for comment from Barron’s.

The move could add complications to traffic in the $5 trillion global gold market, as physical trading on the London Metal Exchange is often hedged through futures trading on New York’s Comex.

A futures contract allows a buyer to lock in a certain price prior to taking delivery, hedging her investment against day-to-day changes in the spot market.

Switzerland, the world’s biggest gold refiner, acts as a conduit between the two markets, often repurposing the 400-ounce bars traded in London to the smaller 100-ounce sizes used for trading in the U.S.

“The U.S. futures market is often used by bullion banks globally as a highly liquid, round-the-clock hedging tool for transactions in the physical bullion market,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Gold futures for December delivery, the most active contract, hit a record high of $3,534.20 per ounce in overnight trading, and were marked around $120 per ounce more than spot London prices. Last week, that spread was around $53.

Traders are wondering if Trump will stick to his guns when it comes to gold tariffs. “For now, it’s worth watching whether another ‘TACO moment’ will emerge,” Hansen added. “If not, the spread may need to settle at a new level that reflects the tariff landscape.”

Gold prices, however, are likely to continue their extraordinary post-Covid run, which saw the bullion rise by more than two-thirds and reach an all time closing high of $3,500 per ounce in late April. Spot prices were at $3,456 per ounce in late Friday trading.

Investors have grown increasingly attracted to gold as both a hedge against inflation and a safe-haven asset. Its recent surge, however, is also tied to concerns over debasement of the U.S. dollar.

Gold, which pays no interest, tends to rise in value as global central banks reduce rates, making it an attractive option during an economic slowdown.

“Gold-backed [exchange-traded fund] holdings have picked up sharply since the start of this year and also provided support to prices,” said Haman Hussian, climate and commodities economist at Capital Economics.

“One of gold’s key qualities is that it isn’t strongly correlated with most other assets,” he added. “A weaker relationship with [inflation-linked Treasury bond yields] means that gold could be a safe haven from unorthodox U.S. policymaking—a feature of the Trump administration—or, worse, a U.S. fiscal crisis.”

The SPDR Gold Shares EFT, the world’s largest, has risen around 8.1% so far this year, largely in line with the 8% advance for the S&P 500 but well shy of sport gold’s 30% gain.

Central banks themselves are also massive buyers of bullion, as they diversify their currency holdings. That acts as a prop to global gold prices.

Overall central bank purchases have been slowing, however, and that has in part stalled the global gold rally.

The World Gold Council notes that overall buying through the three months ending in June totaled 166 tons, a 33% decline from first quarter levels.

ING’s commodities strategist Ewa Manthey, however, argues tariff uncertainty and the dollar’s long year-to-date slum will stoke central bank buying into the back half of the year.

China, in particular, is likely to keep adding to reserves as its dollar-based exports to the U.S. slow amid the continuing trade war between Washington and Beijing.

A further boost is likely to come from Trump’s effort to remake the Federal Reserve with a dovish chairman and rate cut-supporting governors.

In the meantime, the CME Group’s FedWatch suggests traders see a 90% chance of a quarter-point reduction when the Fed meets next month in Washington. They have also penciled in as many as two more cuts before the end of the year.

“The Fed cutting rates could be the catalyst that has been missing to reignite that record-breaking rally once again,” Manthey said.

Write to Martin Baccardax at martin.baccardax@barrons.com