The London Gold Market Is Relying On Continual Gold Imports To Maintain The Appearance of Liquidity Of Its Cash Gold Market
There Had Better Not Be A Disruption Of Gold Imports (Or Gold Lending)
The heart of the problem that is the London gold and silver Over-The-Counter (OTC) cash trading market is that it is based on trading of promissory notes for immediate ownership of metal with only a tiny fraction of that metal available for delivery.
This August 24, 2024 post showed that there is an estimated 9,500 tonnes to 14,300 tonnes of standing claims in the London cash (immediate ownership) OTC gold market.
And yet, London gold vaults hold a ‘float’ of only 1,300 tonnes of gold that are not held by ETFs or the Bank of England for itself and other nations.
The large majority of the London 1,300 tonne vault float is owned by holders that do not trade gold - only a small portion of the float is available to market for settlement of these spot gold promissory notes when delivery is demanded.
Elevated implied market lease rates for gold since 2022 show that the physical gold lending market is stressed due to a now chronic shortage of physical metal.
Given that there may only be a few hundred tonnes (or less) of gold in London vaults available for settlement of claims vs the up to 14,300 tonnes of gold ownership claims indicated standing in the cash market, the Achilles Heel of the London market is physical delivery demand.
In Q1 and Q2 2024, there were 397 tonnes of London OTC market vault withdrawals of gold and UK import/export data show a net export (imports minus exports) of 40 tonnes of gold out of the UK through June:
Figure 1 - UK Gold Import / Export Data; source: goldchartsRus.com
Given the small apparent gold float, the London market is thus dependent on continued imports of gold should delivery demand for gold continue or increase.
Meanwhile, the draw of physical gold globally is intense with accelerating delivery demand on the Shanghai Gold Exchange (SGE) totaling 1,400 tonnes so far this year in a global 4,900 tonne annual gold market has led to high Shanghai gold premiums compared to London.
Figure 2 - Shanghai Gold Exchange (SGE) Gold Delivery Volumes 2008 to Present; source: goldchartsRus.com
In Closing
The London promissory note market for gold and silver that has existed since 1987 appears to be teetering due to the strong global demand for physical gold and silver bars while such a large cohort of London cash/spot contract metal ‘owners’ exist.
To date, the Bank of England and bullion bank operators of this market have relied on the large majority of paper metal owners being satisfied that the spot contracts that they held meant that the contract owners actually owned metal.
Given the growing global shortage of gold and silver, it appears only to be a matter of time before a counter party to a London cash/spot gold promissory note defaults on delivery starting a rush of these paper note holders to demand delivery and dropping the kimono on the London market.
Given the enormous paper-to-metal gearing in London, the rush is likely to be very short.
Best regards,
David Jensen
Excellent reporting. It’s pretty obvious where it’s headed… anyways as Olivia Newton John sang “let’s get physical”😬
Good point. My fear is that when it hits most will be in the same boat as Madoff victims. And the gov will blame the BRICS and take us to war. They will never say…we did this and used the banks to commit these crimes. That would be like the Big Guy admitting he is in fact the big guy.