Why are banks flying out gold from London to New York?

Banks are rushing to move out gold from vaults in the United Kingdom capital of London to New York. Driven by fears of US President Donald Trump starting a global trade war, some banks have jumped into action as a wide gap emerges between gold prices in the two trading hubs of the yellow metal, New York and London.

Reports say US gold inventories have doubled since Trump won the US presidential elections in November last year. The Republican’s threatened tariffs on European imports have turned the gold market upside down, leading to the biggest trans-Atlantic movement of physical bars in years.

Let’s take a closer look.

US banks pull out gold from London

Fears of Trump imposing tariffs on Europe have resulted in a surge in gold prices in New York. However, London has seen a drop in rates of the precious metal since late last year.

After the US President imposed 25 per cent import taxes on steel and aluminum , traders are jittery his next target could be the yellow metal.

Now, gold is being flown from the UK capital to New York City where the commodity is more valuable at the moment.

The US bank JPMorgan and the UK’s HSBC Holdings are among the major banks shipping the yellow metal from vaults in London to Manhattan, reported Wall Street Journal (WSJ).

As per Independent, a complex network of tunnels deep below London’s Threadneedle Street houses the world’s second-largest depository of gold. Since Trump’s tariff threats, US banks are scrambling to fly the precious metal stored in the Bank of England’s nine heavily secured vaults.

The gold market in the UK and the US are mostly in sync. But when there is a notable difference in prices, traders can jet gold where the prices are higher.

As per the WSJ report, gold futures in New York have increased 11 per cent this year, reaching $2,909 (about Rs 2.5 lakh) a troy ounce last week. Some analysts predict it could rise to a record-high of $3,000 (about Rs 2.6 lakh) a troy ounce.

Since early December, gold prices per troy ounce have been about $20 (Rs 1,739) lower in London.

Deputy Governor of the Bank of England Dave Ramsden, told The Telegraph it was flooded with requests for shifting the bullion out of its vaults after New York’s futures market prices surpassed the London cash price.

How is gold being transferred?

It is not easy to shift physical gold from London to New York. US banks are using the cargo hold of commercial planes to safely transport the precious metal across the Atlantic.

The cost-effective process includes security firms carrying gold bars in high-strength vans to the airport in London, reported WSJ.

Before reaching their destination in New York, they are sent to Swiss gold refineries to recast as New York’s Comex contracts require a different size of bar.

These recast gold bars are then flown to the US on commercial flights.

The Bank of England is, however, struggling to meet the rising demand for gold. “There are real logistical constraints and security constraints,” Deputy Governor Ramsden said earlier this month. “Getting into the bank for me this morning was a bit trickier because there was a lorry in the bullion yard…It takes time and the stuff is also quite heavy.”

But why move gold?

Gold is considered a safe haven in times of uncertainty. US banks are transferring the yellow metal from London to New York to reportedly cover losses on short futures positions.

Banks like JPMorgan and HSBC own a large amount of gold in London, which they often lend out to borrowers to earn a return. They protect themselves against price falls by selling gold futures in New York.

As WSJ noted, the trade seems almost without risk when gold prices are close in London and New York. However, when prices on New York’s Comex exceeded those in London after Trump’s win, banks that had sold futures contracts in New York started facing losses.

These banks have found a solution to turn these losses into profits by moving physical gold bars from London to New York, instead of buying back the futures contracts at a loss.

Banks are cashing in on the price disparity in the two cities by moving out huge quantities of gold.

According to Independent, nearly 8,000 gold bars are estimated to have been removed from the Bank of England’s vaults over the past few months, amounting to about two per cent of its total reserves.

Comex filings show JPMorganChase alone is projected to deliver $4 billion (about Rs 34,000 crore) of gold this month.

With inputs from agencies