How Volatility, Tariffs, and Supply Shocks Have Forged Gold’s New Normal

Key topics:

• Geopolitics and tariff fears are fueling market volatility
• Supply shortages are driving gold into backwardation
• Arbitrage and hedging offer key opportunities for traders

The global precious metals market is transforming, reminiscent of turbulence last seen in the 1970s. According to Greg Frith of the StoneX Precious Metals Sales & Trading team, political shifts, tariff threats, and unprecedented logistical moves are driving volatility and forcing market participants to rethink long-held strategies. He feels that recent developments—particularly in gold and silver markets—underscore the need for agility, risk management, and innovative trading solutions.

Trump’s Tariffs and Geopolitical Uncertainty

In the wake of a new era marked by the America First policy, markets are bracing for the possibility of tariffs on precious metals. Following the election of US President Donald Trump, that uncertainty has increased further, especially following the early deployment of tariffs as political levers within the first month of the administration.

While gold traditionally has been considered a monetary asset and less likely to face tariffs, Frith senses that the shifting political landscape has led traders to adopt a precautionary approach. Institutions, especially major banks, have been actively increasing their physical gold inventories in New York’s Comex vaults—echoing a phenomenon last seen during the Covid pandemic in early 2020.

He adds that this pre-emptive behaviour is more than just defensive posturing and has fundamentally altered the dynamics between the over-the-counter (OTC) physical markets in London and the paper-driven futures markets in New York. With the prospect of tariffs looming, market participants are rebalancing their positions to mitigate risks, thereby triggering significant arbitrage opportunities and price dislocations.

From Gold Contango to Backwardation

One of the most notable market shifts that Frith observes has been the transition from contango—where future prices exceed spot prices—to backwardation. Traditionally, traders holding short positions in physical gold have benefited from the pricing structure inherent to a contango market. However, as gold has been rapidly moved from London to New York, the market has experienced a severe squeeze. Frith notes that this shortage has reversed typical pricing dynamics, forcing traders to incur additional costs to maintain their positions.

The Exchange for Physical (EFP) mechanism, a tool designed to balance physical inventories against futures positions, has sat at the heart of this transformation. In recent months, premiums for moving gold have surged dramatically, reflecting the heightened liquidity challenges and urgency of securing physical. For many market participants, the sudden shift to backwardation has not only increased carrying costs but also precipitated short squeezes as traders race to exit positions.

Global Trade and the Ripple Effects on Commodities

Beyond gold, other precious and base metals are experiencing similar disruptions. The logistics of transferring physical metals across continents have been stressed by increased demand, limited refinery capacity, and congestion in shipping channels. In London, where physical trading typically relies on standardized 400-ounce bars, Frith notes that the need to convert these into deliverable forms for New York’s market has led to significant delays and a tightening of supply.

More broadly, global trade policies are influencing commodity markets across the board, an example being the changing dynamics of the copper market, where market participants are positioning themselves for tariffs and adjusting their hedging strategies.

Moreover, geopolitical tensions between the United States and China have added further layers of complexity. As China contends with capital outflows and devaluation pressures, ripple effects are being felt in futures trading volumes and cross-market arbitrage opportunities.

Finding Opportunity in Gold Volatility

There has been an undoubted surge in gold market volatility of late–a scenario that, while challenging, also presents distinct opportunities for market participants. As the market continues to evolve under the influence of uncertainties and realignments, Frith believes that the companies that embrace change and can adapt to the new normal quickly will be best positioned to benefit from what may be the most dynamic commodities market of the past half-century.

---Written by: Gus Farrow

---Expert: Greg Frith, StoneX Precious Metals Sales & Trading

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