London's $425B Daily Gold Trade Dwarfs Oil Trading And How Gold Directly Competes With Bonds for Investors

Don't Let Them Say Gold Isn't Important

We repeatedly hear from analysts and financial institutions that the gold market is small and of little significance to global financial markets.

Let’s have a look at whether that claim is true.

This prior post shows that, using the LBMA’s latest data, London’s daily average gold trading total volume is valued at $425 billion (B) of which the daily cash/spot (immediate physical bar ownership) gold trading volume is valued at $382B.

On a yearly basis, London’s gold cash/spot market trading volume is $95.5 trillion (T).

Gold vs Oil’s Daily Trading Volume

It is said that oil is by far the largest value and highest volume physically traded asset globally. Let’s look at the numbers.

Daily oil spot/cash trading amounts to 40M barrels (bbl) per day giving it a global daily cash/spot trading volume of $3B per day compared to gold’s cash/spot $382B daily trading volume in London.

Global average oil futures trading volume is approximately 3 billion bbl per day. That yields daily oil futures trading volume of $225B and total oil trading volume of $228B compared to London’s total gold market daily trading volume that averages $425B per day.

Gold vs US Bond Market Daily Trading Volume

Looking at the US bond market of which Treasuries are the largest and most liquid market, daily US Treasury bond market trading volume averaged $592B per day in 2022. London’s daily gold trade compares at $425B.

Other US bond (fixed income) average daily trading volumes are:

US investment grade bonds: $26B

Municipal bonds: $14.1B

Agency Mortgage Backed Securities (MBS): $240B

Historical Context of Gold’s Competition With Bonds

From 1971 (when President Nixon temporarily defaulted, they said, on the US Dollar’s fixed convertibility into gold) until 1980, the price of gold ran 21x higher.

US bonds were termed ‘certificates of confiscation’ in 1980 as loose central bank monetary policy drove goods price inflation to 13.5% seeing the Fed Funds interest rates peak at 22% in December 1980.

The Fed Funds Rate was forced 8.5% higher than the Fed’s overnight interest rate to draw investors out of gold (and silver) and back into fiat currency debt instruments such as Treasuries as investors had lost confidence in the dollar maintaining its buying power.

Figure 1; Fed Funds Effective Rate

In this context of gold limiting the ability of central banks to juice financial markets by drawing investors out of stocks and bonds and enforcing government fiscal discipline by forcing interest rates higher, we can see why financial institutions and their operatives and governments themselves wish to minimize the perception of gold as a financial instrument and viable form of investment.

Last week, with US equities, home prices, and food prices at or near all-time highs, Fed Chair Powell at Jackson Hole announced that the Fed needs to start lowering rates.

We can start to see why physical gold is being stripped from London’s OTC vaults at a record pace.

Demand for physical metal is kryptonite to an unbacked promissory note pricing system as is operated in London.

London’s highly geared paper pricing scheme for gold and silver is in trouble.

Best regards,

David Jensen