evening wrap (deja vu all over again)
market vibes
11:30 PM EDT
Question: What is the 1st rule when you are digging a hole for yourself?
Answer: Put the shovel down.
The gold EFP popped out of line again today, trading as high as $70 to $110/ toz. over London, according to people who know. This is curious because there are no imminent delivery dates for 4 months and no financial exigencies that would incite a short covering scramble for futures. Some attributed the blip on the exchange to the tariff on Swiss gold bullion imports to the US. But there is already a glut of gold in NY. Every dealer laid in excessive quantities of inventory in Q1.
Comex August/ December gold spread, chart below.
A quick review
In Q4 2024 and Q1 2025, for various reasons, money center banks at year-end needed to tap internal positions for USD liquidity. Gold EFPs require a lot of balance sheet, so one by one, a cascade of gold EFP liquidation ensued.
As spot gold was sold for dollars, short futures positions, the other side of the EFP (exchange of physical for futures), had to be covered. As we all found out after the fact, there was a shortage of futures, and the premium on COMEX over London shot up fourfold to such high relative premiums that the few banks with liquidity bought the discounted gold and sold the extreme premium in futures to capture a compelling arb.
From that position, the arbitrageur had to acquire the physical LBMA 400-troy-ounce bars, melt them into 100-troy-ounce COMEX good delivery bars, fly them to NY, and deliver them into the February 2025 contract by no later than February first notice day.
The rub
This sounds formulaic, but it is anything but. Logistics dealing with refinery queues, airfreight, a documented chain of custody, and local storage is challenging work. Nevertheless, 25 million of ounces of gold that really did not belong in NY came to NY to fill a hole in london last year, and they are still here now.
By the middle of February, COMEX gold inventories rose from 10 million troy ounces to 40 million troy ounces. The gold was, and still is, subject to price risk and must be hedged. In my opinion, the EFP position that was initially liquidated in late November, mid-December, and mid-January actually doubled or more and mutated. An EFP is a short-dated convenience to offer a liquid spot price to commercial producers and consumers. Funding is similarly short-dated.
The gold arbed into NY was an open position with no due date, no customer. So there it sits, collecting contango carry and costing margin, insurance, and opportunity. By my reckoning, >$100 billion of it. It is probably the longest-dated, largest EFP in the history of gold trading.
So now what ?!?
