Massive Silver Flows, Potential Short Squeeze from Trump Tariff Threat

Gold and silver have traded quietly but with a positive bias this week, and it looks like we'll be closing out the week on a positive note.

As of Friday midday recording, gold is trading at $2,709, its highest mark in a month and up 2.1% for the week. Silver meanwhile is coming in at $30.65 which is a gain of just over 80 cents or 2.8% since last Friday’s close.

At the same time, though, there are some very interesting developments unfolding in the global gold and silver markets, particularly with respect to silver. The implications could be huge, even if price moves have so far been small.

Here's the situation.

Since December, fears have emerged that President Donald Trump may impose tariffs on imports of many commodities, including, potentially, gold and silver. The tariffs would not be imposed on most countries, but Canada, Mexico, and China have been among those mentioned.

As it happens, Canada and Mexico export vast quantities of gold and silver to the United States. If Trump slaps a tariff of, say, 10% on metals coming into the U.S. from those nations, that would have a huge impact. 10% on silver would amount to $3 per ounce.

As a result of this worry, the price of gold and silver – as traded on the New York futures market – has risen sharply above the prices seen simultaneously in other markets. London is a massive hub for precious metals trading, for example, with many gold and silver transactions worldwide priced based on the London spot price. So, this dynamic involving potential U.S. import tariffs has led to a large discrepancy in price between London and New York.

That risk has created a high incentive for parties all over the world to get their gold and silver into the U.S. before any tariffs are imposed. Including those buying metals in London (simultaneously selling in the NY futures), withdrawing the metal from London vaults, and ship or fly the metal to the U.S. to deliver onto the exchange to close out the futures position.

In silver, the spread between London spot and New York futures has at times reached as high as $1 per ounce. One dollar per ounce is dramatically more than the cost of transporting silver across the Atlantic, so many opportunistic traders are scrambling to do just that and pocketing most of that $1 spread.

This dynamic is having the effect of draining London vaults of gold and silver at an unusually fast rate -- and at some point, these lower levels of vaulted metal in London could create price dislocations in that market too. At the same time, those who have short positions in the New York market are in danger of getting squeezed, especially if they have trouble getting their hands on enough physical metal to deliver into their short positions.

It's too early to tell, but these developments could lead to a true short squeeze in precious metals, particularly with respect to silver. We'll be watching this situation carefully and will keep our readers and listeners updated at MoneyMetals.com.

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