Last time this much gold crossed the Atlantic, the French were repatriating their gold reserves from New York — in the 1960s, a few years before the gold-based Bretton Woods monetary system collapsed. The time before then, in July 1940, Operation Fish had the Brits shuffle away 1,500 metric tons to Canada, to keep the treasure away from Hitler in the event the latter would capture London.
The armies imminently circling London these days are of a different sort, clad in bankers’ attire rather than military uniform, their appetite for vaulted gold no less strong. Some 500 tons of gold bars have made their way to the New World once more, flown into the Comex commodity exchange vaults in New York in recent days and weeks — most coming from London directly, or via pit stops at refineries in Switzerland and elsewhere (to be melted into the exact Comex specifications — 100 oz bars vs London’s 400 oz).
Robert Armstrong at the Financial Times gives appropriate voice to the bewilderment (italics in original): “…the gold is then flown to New York (Planes! To settle a financial transaction! In the 21st century!).”
Understandably, some logistical problems have emerged. The Bank of England reported at its monetary policy committee press conference on February 6 that all its gold delivery slots are backed up for weeks. Dave Ramsden, deputy governor at the Bank, put it bluntly: “it’s an obvious point, but, you know, gold is a physical asset. So there are real logistical constraints and security constraints.”
Gold has backstopped the global monetary and financial system for centuries — obviously so under the various gold standards (classical, interwar, Bretton Woods), but no less important during the last fifty-odd years of pure fiat money. Central banks have for the most part held on to the gold of ages past; in recent years some of them — Poland, Russia, China, India — have acquired sizable amounts. (The World Gold Council now routinely reports that the central banks buy above 1,000 tonnes a year.)
When gold shot up to above $2,900 earlier this month, the growing pains of this most ancient and analog of financial assets clashed with the fast-paced, modern, digital financial system that surrounds it.
Two things happened at once to unleash a flood of gold bars shuttling across the Atlantic at full speed — or at least the speed of the cargo hold in a passenger jet, as Joe Wallace reported recently for The Wall Street Journal. The New York gold price acquired a premium of upward of $70 during a few days last week; at $2,900, that 2.5 percent premium was enough to salivate the mouths of bullion traders and arbitrageurs everywhere.
Secondly, the sudden price jump sent the spot-vs-futures market for gold in complete disarray. A gold-dealing bank often lends out its gold to borrowers who use the bullion as collateral for various types of financial market trades and operations. The bank charges interest on the loan but is in the deal for interest revenue rather than gold price exposure, so it hedges out the price risk by selling gold futures.
That seems clear enough: the bank gets interest, the borrower carries price risk, the holder of futures contract takes later delivery of gold.
The hiccup?
Most gold, for historical and path-dependency reasons, sits physically in vaults below London, while the futures contracts are traded in New York.
In a typical pennies-in-front-of-steamrollers trade, then, a number of banks got themselves in a pickle. Since they’re short gold on the futures leg of the trade, and buying futures at higher gold prices to close out that exposure would saddle the bank with substantial losses, the obvious emergency solution was… to fly the gold over the pond. Writes Greg McKenna for Fortune:
Typically, traders have no intention of fulfilling their obligation to deliver physical gold and instead purchase futures contracts to close out their positions. Instead of taking that loss, however, some dealers have found it’s cheaper to pay up — even if that means using plenty of frequent-flier miles.
“Banks,” described Joe Wallace for the Wall Street Journal, “run big offsetting positions, owning gold bars in London, lending them out to earn a return and hedging the risk that prices fall by selling futures in New York.”
Some candidate explanations for why gold prices suddenly exploded upward in recent weeks and months — and specifically the gap between London and New York opened up — include Trump’s tariff threats; expectations of monetary policy diverging between Europe, the UK, and the US; transitions from LIBOR to SOFR interest rates; and real rates coming down.
It’s always hard to determine exactly what market prices are telling us, but what Rob Haworth at US Bank Wealth Management says in an interview for Fortune seems obvious enough: “We have too much gold in London and not enough gold in New York.”
After this last week’s mad dash, hopefully we’ve rebalanced. Adrian Ash, of BullionVault, told Sky News that, “This is a financial market phenomenon. It’s helped juice prices higher, but it hasn’t had any real impact on the availability of metal.”
Consequently, he says, it’ll “all come back out again.”
It’s ironic that it’s around gold that the financial system is squeaking. Lyn Alden, in her book Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better (which I helped edit and research), identified precisely this discrepancy in speed as a prime candidate for why the twentieth-century march toward fiat money was unavoidable: information, about bank ledgers, debts, and contracts, moved at the speed of light, while gold, the settlement media underpinning it all, shipped at the speed of… ships.
As of Friday evening, the New York and London gold prices were once more roughly in line, the golden arbitrage having rapidly closed. Lease rates, a type of gold interest rates, have come down as well from their heights above 5 percent just a few days ago. Maybe this is the beginning of gold’s new role in the global, geopolitical monetary system. Or maybe Ash is right, and it was all just a glitch in the glittering matrix that is the gold market.
