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 collapse of the gold-based Bretton Woods monetary system. The previous time, in July 1940, Operation Fish had 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 banker's clothes instead of military uniform, and their appetite for gold in the vaults is no less strong. Some five hundred tons of bullion have arrived back in the New World, having flown into the vaults of the Comex commodities exchange in New York in recent days and weeks; most of it has come directly from London or has stopped off at refineries in Switzerland and elsewhere (to melt to Comex's exact specifications: 100-ounce bullion versus 400-ounce bullion from London).

Robert Armstrong, of the Financial Times_,_ gives appropriate voice to the bewilderment (italics in original): "...the gold is then shipped to New York (Airplanes_! To settle a financial transaction! In the 21st century!_)."

Understandably, 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 slots have been saturated for weeks. Dave Ramsden, the Bank's deputy governor, put it bluntly: "It's an obvious point, but, you know, gold is a physical asset. So there are real logistical and security constraints."

Gold has been the mainstay of the world monetary and financial system for centuries, obviously under the various gold standards (classical, interwar, Bretton Woods ), but not least during the last fifty-odd years of pure fiat money. Central banks have for the most part held on to centuries-old gold; in recent years some of them (Poland, Russia, China, India) have acquired considerable quantities. (The World Gold Council now routinely reports that central banks buy more than 1,000 tons a year).

When gold soared to over $2,900 earlier this month, the growing pains of this oldest and most analogous of 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 bullion moving across the Atlantic at full speed (or at least at the speed of the cargo hold of an airliner, 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. 

Secondly, the sudden rise in prices caused complete chaos in the spot gold market versus futures. Banks that trade in gold often lend their gold to borrowers who use the bullion as collateral for various types of operations and transactions in the financial market. The bank charges interest on the loan, but what it does is earn interest income rather than exposure to the gold price, so it protects itself from price risk by selling gold futures.

This seems clear enough: the bank gets the interest, the borrower bears the price risk and the holder of the futures contract subsequently receives delivery of the gold. 

The hiccups? 

Most gold, for historical and path dependency reasons, is physically held in vaults below London, while futures contracts are traded in New York.

In a typical trade where a few cents are put up for sale against a steamroller, several banks found themselves in trouble. Since they had short gold positions in the futures part of the trade, and buying futures at higher gold prices to liquidate that exposure would mean substantial losses for the bank, the obvious fallback solution was...to blow 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. Rather than take that loss, however, some traders have found that it is cheaper to pay up, even if that means using a lot of frequent flyer miles_._

"The banks," Joe Wallace described for the Wall Street Journal, "hold large offsetting positions, own bullion in London, lend it out for a yield, 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 the gap between London and New York opened up) 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 for Fortune seems pretty 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 equilibrium. BullionVault's Adrian Ash told Sky News that "this is a financial market phenomenon. It has helped drive prices, but has had no real impact on the availability of the metal." 

As a result, he says, "everything will come to light again."

It is ironic that the financial system is in crisis around 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 velocity as a prime candidate for explaining why the 20th century's march toward fiat money was inevitable: information on bank ledgers, debts, and contracts moved at the speed of light, while gold, the settlement medium that underpinned it all, was shipped at the speed of...ships. 

On Friday night, gold prices in New York and London were back roughly in line as the gold arbitrage had quickly closed. Lease rates, a type of gold interest rates, 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 maybe Ash is right and it was all just a glitch in the brilliant matrix that is the gold market.

Joakim Book, The Daily Economy