How Trump Tariff Fears Reshaped Global Bullion Markets

In the quiet Swiss town of Mendrisio, near the Italian border, the Argor-Heraeus refinery has been operating at unprecedented levels since December. The facility’s furnaces have been roaring 24 hours a day, as workers pour molten gold into molds around the clock to meet soaring demand for 1-kilogram gold bars in New York.

“We’ve never seen sustained peak demand like this before,” explains Robin Kolvenbach, co-chief executive of the refinery. “Typically, high demand periods last a week or two. This has continued for more than three months.”

This extraordinary activity stems from market speculation that the Trump administration might impose tariffs on gold imports. Though the president has never explicitly mentioned such measures, the mere possibility has triggered a massive gold migration to the United States, helping push prices to record highs of nearly $3,000 per troy ounce and creating significant distortions in the global gold market.

The Physical Reality of Digital Trading

The current gold rush has exposed a peculiar quirk in global bullion markets that many traders rarely consider: gold is ultimately a physical commodity that must be transported and stored. Despite the instantaneous nature of electronic trading, moving actual gold from London to New York requires time, specialized security, and infrastructure.

“The physical nature of gold is something that is underestimated, particularly by finance professionals who trade it digitally all day,” notes John Reade, senior market strategist at the World Gold Council. “Gold has financial characteristics, but it is also a physical asset.”

This physicality becomes even more complicated due to differing standards between the world’s two major gold trading hubs. London, the largest physical gold trading center globally, primarily uses 400-troy-ounce bars (approximately 12.5kg) that are roughly the size of a brick. Meanwhile, New York’s Comex exchange uses smartphone-sized 1kg bars as its benchmark.

This size discrepancy necessitates what has become known as the “triangular trade” – gold bars must travel from London to Switzerland for recasting before continuing to New York.

Journey from London’s Underground Vaults

The journey begins beneath the streets of London, in one of nine gold vaults under the Bank of England. When withdrawal orders come in, specially vetted staff must physically locate and retrieve the requested bars – a labor-intensive process that cannot be quickly scaled up to meet surging demand.

By early December, the withdrawal queue at the Bank of England had stretched to more than four weeks, creating a liquidity crisis in London’s bullion market. Short-term lease rates for gold reached record levels as traders struggled to secure physical metal, significantly increasing working capital costs for businesses throughout the supply chain.

Bank of England deputy governor Dave Ramsden acknowledged the situation in February, noting, “Gold is a physical asset, so there are real logistical constraints and security constraints.”

London’s historical dominance in physical gold markets persists despite these inefficiencies. The Bank of England charges lower fees than commercial vault operations, and its centuries-long track record of safeguarding gold has built unparalleled trust among investors and central banks worldwide.

“London has the historical advantage, hands down, going back to the gold standard, which operated very well from the end of the Napoleonic war up to the First World War,” explains Jim Steel, chief precious metals analyst at HSBC. “There is a long legacy of gold operations coming out of the UK and the Bank of England.”

The Swiss Connection

Once extracted from the Bank of England’s vaults, the gold bars are transported via armored truck to Heathrow Airport and flown to Zurich in passenger aircraft, which for insurance reasons can carry only 5 tonnes of gold per flight.

Upon arrival in Switzerland, the bars are driven to refineries like Argor-Heraeus, where they undergo transformation. The 400-ounce bars are melted at temperatures exceeding 1000°C and reformed into strips through a continuous casting machine. These strips are then cut into roughly one-kilogram pieces, which after weight adjustment are melted again and poured into standard 1kg molds.

After cooling, stamping, and polishing, the newly formed bars are ready for their final journey to New York. The entire process – including transportation and recasting – costs approximately $3 to $5 per ounce.

Market Disruption and Financial Impact

The sudden surge in gold lease rates has had painful consequences for refineries, which typically lease most of the gold they process to reduce working capital requirements and avoid exposure to price fluctuations. Kolvenbach described the situation as a “black swan event” that fundamentally altered the industry’s cost structure. Although rates have declined from their February peak, they remain about triple normal levels.

This market disruption has raised questions about why New York and London continue to use different size bars for their contracts. Comex attempted to launch a futures contract for 400-ounce bars during the pandemic, but it failed to gain traction.

Ruth Crowell, chief executive of the London Bullion Market Association, believes the markets should eventually standardize: “I’d like to think that after this, we can all agree that London and New York should be looking at the shape and size of bars.”

However, Reade suggests the system persists largely due to inertia, while noting that “it certainly creates financial opportunities for everybody involved in this process, whether it’s refiners, shippers, or traders willing to take the risk.”

Looking Ahead

As fears of gold tariffs have begun to diminish, the flow of gold into New York is slowing. If Trump’s protectionist policies ultimately spare precious metals, market analysts expect the flow to reverse, with long-term holders of gold looking toward London’s more economical storage costs.

When that happens, Swiss refineries will once again fire up their furnaces around the clock – this time to transform 1kg bars back into the 400-ounce bars preferred in London.

This golden triangle of trade between London, Switzerland, and New York highlights not just the enduring value of gold as a safe-haven asset, but also the surprising complexities and physical constraints that continue to shape one of the world’s oldest financial markets.