The furnaces are roaring 24 hours a day at the Argor-Heraeus refinery in southern Switzerland, punctuated by the occasional plunk of a freshly poured gold bar falling out of its mould.
The refinery has never been busier, according to co-chief executive Robin Kolvenbach, and the foundry has been working around the clock since December to keep up with massive demand for 1kg gold bars in New York.
“Demand has increased quite a bit,” said Kolvenbach. “Typically a period of peak demand would last for one or two weeks. But peak demand like we have at the moment, which has lasted more than three months, is quite unusual.”
Since December, fears that US President Donald Trump could slap tariffs on gold imports have upended the market — and helped the gold price to a record high of more than $3,000 per troy ounce on Friday. More than $61bn of bullion poured into the US as traders scrambled to avoid the potential levies, distorting the country’s trade data and sparking a shortage in London, the world’s biggest gold trading hub.
The American gold rush has kept Kolvenbach very busy, thanks to a quirk in global bullion markets: the two markets use different size bars. In London, most trading is in 400-troy-ounce bars, each weighing about 12.5kg and roughly the size of a brick.
New York’s Comex exchange, by contrast, uses smartphone-sized 1kg bars as its benchmark. That means bars heading across the Atlantic must first make a stop in Switzerland — home to the world’s largest gold refineries — to be melted down and recast.
In a world where financial transactions ping around the world in a fraction of a second, the booming triangular trade underscores the gold market’s reliance on lumps of metal. In normal times, claims on billions of dollars of gold are traded without the bars ever leaving a vault.
But the distortions created by Trump’s radical trade policies have strained the system. Even though Trump has never mentioned bullion tariffs, the slight chance that he might do so was enough to send the price of gold futures in the US higher than in London, creating an arbitrage opportunity for traders willing to transport the metal across the Atlantic.
The last time a significant price gap opened was during the early stages of the pandemic. But the hoard of gold in New York has now surpassed even its previous, Covid-era record.
“The physical nature of gold is something that is underestimated, particularly by a bunch of finance people who trade it on their Bloombergs all day,” said John Reade, senior market strategist at the World Gold Council. “Gold has financial characteristics, but it is also a physical asset.”
Liquidity crisis
The journey of the gold bars flowing into New York typically begins deep underground, in one of the nine gold vaults beneath the Bank of England in the heart of the City of London.
When an order is placed to withdraw gold bars, a worker will go into the vaults and “dig out” the gold requested, which can often involve shifting around other bars to locate the specific bars that are in the order. Because London is built on clay, the soft foundations of the BoE building mean that gold can only be stacked to about shoulder height.
The process is very time-consuming, and has resulted in the biggest bottleneck in the supply chain for 1kg bars. The staff who dig out gold must be highly vetted, carefully trained, and strong enough to lift gold bars all day long — so staffing levels cannot quickly be increased to meet short-term demand.
The first signs of the surge emerged in early December, when industry figures gathered at a dinner hosted by the London Bullion Market Association (LBMA) at the National Gallery, and discussed the growing demand coming out of the US.
As traders raced to move gold from London to New York, the queue to withdraw gold from the BoE soon stretched to more than four weeks, causing a liquidity crisis in the London bullion market.
Short-term lease rates for gold shot to record levels last month, as traders struggled to get their hands on physical metal, increasing working capital costs for businesses such as refineries and jewellery makers.
“There has been strong demand for delivery slots,” acknowledged BoE deputy governor Dave Ramsden in a press conference in February, in which he admitted having been held up by a lorry in the bullion yard while coming into the building earlier in the day. “Gold is a physical asset, so there are real logistical constraints and security constraints.”
The BoE holds bullion on behalf of dozens of central banks, as well as commercial banks. Only 6 per cent of the gold in its large vaults belongs to the UK Treasury.
London’s pre-eminent position in physical gold markets — despite the inefficiencies Ramsden described and the role of New York as the main futures trading hub — partly reflects the lower fees the BoE charges compared with rival commercial vault operations. But it also underscores the overwhelming importance of trust in the gold market: investors and central bankers are happy to park their gold beneath Threadneedle Street because of a record stretching back centuries.
“London has the historical advantage, hands down, and it goes back to the gold standard, which operated very well, from the end of the Napoleonic war, up to the first world war,” said Jim Steel, chief precious metals analyst at HSBC. “There is a long legacy of gold operations coming out of the UK and the Bank of England.”
‘Black swan event’
Once they leave the BoE vaults, bars are typically loaded into an armoured truck, driven to Heathrow airport and flown to Zurich in the belly of a passenger plane. For insurance reasons, passenger jets carry only 5 tonnes of gold at a time.
From Zurich, the gold is driven to a refinery, where it is melted down and recast, before returning to be flown to the US. The cost of this whole journey between London and New York — including transportation and recasting — is around $3 to $5 per ounce, according to the World Gold Council.
Inside the Argor-Heraeus refinery, which is in the Swiss town of Mendrisio near the Italian border, the large gold bars are melted down and reformed into a long strip inside a “continuous casting” machine. Because the 400-ounce bars are already “fine gold” — referring to the 99.99 per cent purity requirement for investment-grade bullion — they do not need to be further refined, just reshaped.
To do this, the strip of gold from the casting machine is cut into pieces that are roughly one kilo. After a weight adjustment, it gets melted down again, poured into a one-kilo-bar mould — then cooled, stamped and polished.
Walking around the foundry floor, Kolvenbach points out where two workers are pouring kilo bars by hand at adjacent furnaces — the process is running 24 hours a day at the moment, to meet the high demand.
The refinery does much more than recasting, though. It also takes in rough bars from mines and refines them into gold, silver and other metals — as well as manufacturing jewellery and operating a mint that stamps out smaller gold bars. Kolvenbach explains that some of the most important work in the building happens inside its laboratory, which meticulously tests every bar that arrives in the facility.
Here inside the refinery, the liquidity crisis in the wider gold market has had a painful effect, by pushing up the lease rates for gold borrowed on a short-term basis. To reduce working capital requirements and avoid exposure to gold price fluctuations, refineries typically lease most of the gold that they are working on while it is in the factory. The sudden surge in lease rates this spring dramatically increased the operating costs at Argor-Heraeus and other refineries.
Kolvenbach said it was a “black swan event” that fundamentally changed his cost base. “Absolutely it has been a pain, for the whole industry, because in the end everyone is impacted,” he said. Although lease rates have come down from their peak in February, they are still about three times higher than normal levels.
People in the industry offer differing explanations as to why New York and London still use different size gold bars for their contracts.
“Does it make sense? No,” said Kolvenbach. “I had the same question myself. To be honest I never found a proper explanation.”
Comex tried to launch a futures contract for large 400-ounce bars during the pandemic, but it did not take off.
Ruth Crowell, chief executive of the LBMA, said the markets would ideally use the same size bar in the future. “I’d like to think that after this, we can all agree that London and New York should be looking at the shape and size of bars,” she added.
However, the system persists largely because of inertia, argues Reade.
“It certainly creates financial opportunities for everybody involved in this process, whether it’s refiners, whether it’s shippers, whether it’s people that are prepared to take the risk of buying kilo bars and shipping them to New York,” he said.
Today, as the fears of gold tariffs diminish, the flow of gold into New York is slowing down. If Trump’s protectionist push does steer clear of precious metals, traders expect the flow to reverse, as long-term holders of gold eye London’s cheaper storage costs.
When that happens, Swiss gold furnaces will be firing around the clock again.
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