Commodities Spotlight

Echoes of the early days of the COVID-19 pandemic have been heard in precious metals markets as 2025 begins. During those uncertain days, commercial air travel was all but suspended in an effort to control the spread of the virus. This stoppage also had a significant impact on the typically staid world of moving physical precious metals bars between refineries, bullion banks and Gold and Silver buyers by grinding logistics to a halt. The market responded to these supply issues by sharply increasing the Exchange for Physical (EFP) premium, typically representing the difference between the physical precious metals price -- such as the price for Gold bullion in London -- and the closest-to-deliver futures contract. 2025 has seen a rapid expansion in the EFP for metals like Gold and Silver even though airport runways remain active – so what is behind the recent move?

Under normal market conditions, the EFP generally trades in a narrow range, influenced by factors such as futures prices, near-term physical supply and demand in the local market and freight costs to ship bars between locations. When the level of the EFP becomes too rich or too cheap relative to these factors, arbitrageurs will buy or sell futures and move physical metal to rebalance pricing. The COVID-era spike was logistically driven – the result of not being able to physically move metal between locations creating excess demand for futures contracts, which entitle the holder to take delivery of physical metal at expiry, relative to the locally physically available metal to deliver against the contract. This time, the distortion is policy driven – a result of the potential imposition of blanket tariffs by the Trump administration, which would make moving physical Gold and Silver back into the United States to deliver against any short futures position a more costly operation.

For Gold, the elevated EFP has also been supported by several other factors, including a limit on the amount of Gold that can be moved on one flight as insurers have upper limits on the total value they are willing to cover for any single trip. Despite the fact that planes are still flying, airborne transit is still proving to be a potential bottleneck. In addition, physical Gold is typically stored in 400-ounce bars in London bullion banks, while obligations to deliver against futures contracts in the US can only be met with 100-ounce “kilobars”, meaning reprocessing is required, which is likely further delaying normalization in the EFP. The Silver EFP has been similarly supported, though the cause is likely due to a combination of the fact that the United States is a net importer of Silver and that the major import partner is Mexico, a nation that has been targeted with specific tariff threats in addition to any blanket tariff impact.

Uncertainty about tariff policy remains high, and an exemption for precious metals in any blanket tariff would likely cause the EFP to fall for both Gold and Silver. We believe the premium may prove more durable for Silver than for Gold. The value-to-weight ratio is much higher for Gold than for Silver, meaning a lower premium is required before physical metal starts to move. Indeed, we have already seen exchange inventory volumes for Gold rise approximately 75% from December 1st 2024 levels, compared to only a 17% rise for Silver.¹ As further evidence, we have seen declarations to deliver physical metal against short Gold futures positions expiring in February at the second highest level ever, evidence that the elevated EFP premium in Gold has likely caught the eye of arbitrageurs and may not sustain much longer. On the other hand, Silver, with its lower value-to-weight ratio, has not seen a rise in near-term intentions to deliver. This is likely because shipping typically takes place using less costly (and slower) seaborne transport, with extended shipping times lending more longevity to the premium in Silver even once metal begins to move, in our view.