Op-Ed: Hidden Risk: Why $107 Billion in Gold Needs a New Home

Too Many Eggs in One Basket?

Understanding Market Risk

It is obvious by the title of this post that I will be discussing risk. Risk is something we all face every day in our lives. Some live in complete denial of it and some embrace it. Most others just react to it.

If you are in the precious metals industry or related business, you must be aware of the dislocation currently occurring in the marketplace. Since talk of tariffs began when President Donald Trump was sworn in, the Comex has begun paying a higher premium than the London market for gold and silver.

Typically, the spot market is at equilibrium, meaning the price at each location is the same. Of course, plus or minus transportation cost. On occasion in my lifetime, I have seen disparities caused by different market events that spurred the differential. At times London was higher, at other times New York was higher.

This is an opportunity for the arbitrage trade causing large movements of metal from one location to the other and eventually the demand that caused the disparity would be filled and premium of the one location over the other would cease to exist.

In this recent case, we have the unique situation that the factor causing the price disparity has no clear end in sight. This past weekend the USA had announced an increase in tariffs on all goods from Mexico, Canada and China. We expected to get clarity in the markets this week on the effect on the gold and silver markets.

However, Mexico and Canada both negotiated a reprieve and so there has been no publication of exactly what the US government has determined will be subject to tariffs. The world cannot work with blanket commentary, unlike the media, and to avoid being caught with our pants down the US market remains at a premium.

Concentration Risk

The CME or COMEX vaults in the New York area are now burdened with unprecedented values of holdings on their premises. As of last night, these vaults are holding $107 billion in precious metals at current market prices.

One major gold holder that we are working with has been in the process of diversifying their holding across geographic locations since before this market condition even existed. Their concern before was that they had too much location risk between New York and London.

They related to us that they want to spread the risk as they know they were never truly insured dollar for dollar at any of these locations because their values are high and the companies that hold these metals also have limitations on coverage.

Insurance Limitations

Essentially, insurance companies will not take on excess risk on one location no matter how secure that entity is, because if some unknown occurrences were to happen it could risk the entire industry in one fell swoop.

Within this framework of events, it has increased the demand for risk diversification for precious metals away from the New York market locations and additionally for interest in locations that have Free Trade Zone status.

The Wyoming Reserve is in the right place at the right time. With both these factors working in our favor it has driven a flurry of business. We stand at the ready to provide the services needed to the market. As a business-to-business company we are well positioned to execute on delivering the services the market currently demands.