The last time such a large amount of 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 that, in July 1940, Operation Fish saw the British take 1,500 metric tons to Canada to keep the treasure away from Hitler in case he took London.
The armies approaching London these days are of a different kind: they wear bankers' suits instead of military uniforms, and their appetite for the gold in the vaults is no less strong. Some 500 tons of gold bars have returned to the New World, having flown to the vaults of the Comex commodity exchange in New York in recent days and weeks; most come directly from London or have stopped at refineries in Switzerland and elsewhere (to be melted down to Comex's exact specifications: 100-ounce bars versus London's 400-ounce bars).
Robert Armstrong of the Financial Times aptly voices the confusion (italics in the original): “...the gold is then flown to New York (Planes! To settle a financial transaction! In the 21st century!).”
It is understandable that some logistical problems have arisen. The Bank of England reported at its Monetary Policy Committee press conference on February 6 that all of its gold delivery spaces are saturated for weeks. Dave Ramsden, deputy governor of the Bank, put it bluntly: “It's an obvious point, but, you know, gold is a physical asset. Therefore, there are real logistical and security constraints.”
Gold has been the backbone of the global monetary and financial system for centuries, obviously 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 mostly held on to the gold of past centuries; in recent years, some of them (Poland, Russia, China, India) have acquired considerable amounts. (The World Gold Council now routinely reports that central banks are buying more than 1,000 tons a year.)
When gold shot up to over $2,900 earlier this month, the growing pains of this oldest and most analog of all financial assets collided with the fast-paced, modern digital financial system that surrounds it.
Two things happened at once to unleash an avalanche of gold bars moving across the Atlantic at full speed (or at least at the speed of a passenger plane's cargo hold, as Joe Wallace recently reported for The Wall Street Journal). The price of gold in New York acquired a premium of more than $70 for a few days last week; at $2,900, that 2.5 percent premium was enough to make bullion traders and arbitrageurs around the world salivate.
Second, the sudden price spike caused complete chaos in the spot gold market relative to futures. Banks that trade in gold typically lend their gold to borrowers who use the bullion as collateral for various types of financial market operations and transactions. The bank charges interest on the loan, but what it does is earn interest income rather than expose itself to the price of gold, so it hedges the price risk by selling gold futures.
This seems fairly straightforward: the bank gets the interest, the borrower takes the price risk, and the futures contract holder subsequently receives delivery of the gold.
The hiccup?
For historical reasons and due to trajectory dependency, most gold is physically located in vaults beneath London, while futures contracts are traded in New York.
In a typical transaction in which a few cents are put up for sale against a steamroller, several banks found themselves in trouble. Since they had short positions in gold on the futures side of the trade, and buying futures at higher gold prices to liquidate that exposure would mean substantial losses for the bank, the obvious emergency solution was... to fly the gold across the pond. Greg McKenna writes for Fortune:
Traders generally have no intention of fulfilling their obligation to deliver physical gold and instead buy futures contracts to close out their positions. However, rather than take that loss, some traders have found it cheaper to pay up, even if it means using up a lot of frequent flyer miles.
“Banks,” Joe Wallace described for the Wall Street Journal, ”hold large clearing positions, own gold bars in London, lend them out for a return, and hedge the risk of falling prices by selling futures in New York.”
Some possible explanations for why gold prices suddenly spiked in recent weeks and months (and specifically why the gap between London and New York widened) include Trump's tariff threats; expectations of divergent monetary policy between Europe, the UK, and the US; transitions from LIBOR to SOFR interest rates; and falling real rates.
It is always difficult to determine exactly what market prices are telling us, but what Rob Haworth of US Bank Wealth Management says in an interview with Fortune seems quite obvious: “We have too much gold in London and not enough gold in New York.
After last week's madness, we hope to have regained our balance. Adrian Ash of BullionVault told Sky News that ”this is a financial market phenomenon. It has helped drive prices up, but it has had no real impact on the availability of the metal.”
As a result, he says, ‘everything will come back out into the open.’
It is ironic that the financial system is in crisis over gold. 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 document, identified precisely this discrepancy in speed as a prime candidate for explaining why the 20th century's march toward fiat money was inevitable: information about bank ledgers, debts, and contracts moved at the speed of light, while gold, the means of settlement that underpinned it all, was shipped at the speed of... ships.
On Friday night, gold prices in New York and London were back in roughly line, as gold arbitrage had quickly closed. Lease rates, a type of gold interest rate, have also fallen from their highs above 5 percent just a few days ago. Perhaps this is the beginning of gold's new role in the global geopolitical monetary system. Or perhaps Ash is right and it was all just a glitch in the brilliant matrix that is the gold market.
Joakim Book, The Daily Economy