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The article has failed to address the most interesting question: why this spread exists. The most interesting theory is that it's effectively a "bank rank" on

by fuoqi 2y ago

The article has failed to address the most interesting question: why this spread exists. The most interesting theory is that it's effectively a "bank rank" on "paper gold" issued by London, i.e. traders may fear that there are significantly more claims on gold than physically exists in London vaults. If this market blows up, it would be the most spectacular failure with very significant consequences for global financial markets.

secondcoming 2y ago
This theory came up years ago when sites such as ZeroHedge were claiming JP Morgan controls a precious metals international scam and there isn’t enough physical gold or silver to cover everything. People were told to buy as much physical gold and silver as possible because it was all about to burst. Silver went to $50 and then collapsed and it was never mentioned again. Is this theory back doing the rounds?
- zoklet-enjoyer 2y ago
  Never mentioned again? You haven't been on the right parts of the Internet. It's still a common belief. Probably true too
- fuoqi 2y ago
  The difference now is that professional market participants act on this "theory" by physically moving a significant amount of gold from UK to US. And "weeks-long" withdrawal queues certainly do not look great and confidence inspiring. And there is the example of Poland which has repatriated all of its gold from UK years prior and stories like this: https://x.com/SenatorRennick/status/1891051795159429514 https://x.com/SenatorRennick/status/1891051795159429514
  - secondcoming 2y ago
    And yet this physical transfer of gold has had largely zero impact on the price of gold. Nobody was fretting about 'where will we source Poland's gold?'
    - wrfrmers 2y ago
      Well, there's the notion that price no longer quite reflects what's going on under the surface. Certainly, it's in the interests of an entity experiencing a run on its reserves to do everything it can to obfuscate any indication that a run is taking place, including suspicious price shifts. Perhaps it's even more suspicious that such clear movement isn't being reflected in price volatility. If there were no trouble, a small shift reflecting physical movement wouldn't be too dangerous to allow to happen. But what if it wouldn't be a small shift?
- unyttigfjelltol 2y ago
  >there isn’t enough physical gold or silver to cover everything What does this even mean in the context of trading derivatives of commodities? Of course there isn't, people financed other purchases by borrowing precious metals and selling them, or trading futures on margin with no physical position. Isn't that literally what this market is? And, like it or not, it's the endpoint for all holdings of non-productive assets. Lease the metal back to traders and make 1%; hold it and pay 1% in storage fees.
- suraci 2y ago
  I do suspect BoE doesn't have enough gold to deliver now, it looks like so
  - koolba 2y ago
    It’s also standard practice to delay or slow walk withdrawals when you know they’re going to run you dry.
    - cturner 2y ago
      There may be practical issues that explain delays. Consider a team who are staffed to suit normal activity. Then there is a period of increased activity, the team fall behind.
HWR_14 2y ago
If there wasn't enough gold in London, wouldn't that mean that gold claims there would be more valuable, not less? Because in order to fulfill the delivery they will have to repurchase the gold, creating huge demand.
- fuoqi 2y ago
  I do not understand your logic. Imagine I have 1 gold bar and issued 100 paper claims on it. How would one claim worth more than one physical gold bar? After someone retrieves the bar, I will have zero gold bars and 99 claims. Would you buy such claim knowing that I do not have any gold in my vault? It may not be even an outright scam. Those 99 claims may be backed by claims on someone else's gold, but it's likely I will not be able to exercise those claims in a timely manner, making me insolvent. Thus we have a "bank run" situation.
  - HWR_14 2y ago
    I mean, if it's oversubscribed by 100x the amount in existence it complicates things (unless the issuers have 100x the value of their gold in other assets). But if you issued 100 claims on 99 bars, clearly one person is getting something else. If I offer to sell you my paper claim for 2x what it was worth yesterday (for example) then you lose the value of 101 bars of gold after selling 100 bars of gold (net negative 1 bar) and I make a tidy profit. Just like a short squeeze sent GME to $400/share.
  - weitendorf 2y ago
    OP is assuming the oversubscription is due to counterparties being on the hook for gold they are obligated to deliver at a certain time (this is commonplace with commodity derivatives, you simultaneously create contract to buy a certain amount of a commodity at a certain time in the future + a contract to sell a certain amount at the same time in the future - they cancel each other out), not that the entity holding the gold fradulently issued more claims than they could deliver on. So OP is saying that if more gold was redeemed than expected, the counterparties to those claims would be forced to buy gold at whatever the price it ultimately settles on to fulfill the contract. Of course the problem is that there is such a thing as counterparty risk. If delivering the contractually obligated gold bankrupts an individual counterparty, or is physically impossible in aggregate (eg more claims than gold exists) then the contract won't be fulfilled at least for someone. But there is a lot of complexity here because not all futures are settled physically (they can be cash-settled) and there could be mechanisms in place to manage counterparty risk at various levels, like at the exchange, eg https://www.cmegroup.com/education/articles-and-reports/counterparty-credit-risk.html https://www.cmegroup.com/education/articles-and-reports/coun... I wasn't able to read the article because of the paywall but stuff like this is why regular joes tend to think there are bigger problems with gold or finance in general than there actually is. "There is more paper gold than physical gold" - regular Joe thinks there is a problem. "Actually the paper claims' settlement are subject to various conditions, typically closed out before taking delivery, and there is a complex system in place which does its best ensure that anybody who actually wants to take delivery or settle their contract gets it settled as expected" - regular Joe lost interest and went back to doomscrolling.
JumpCrisscross 2y ago
> why this spread exists "...when prices on the Comex surged above those in London late last year, baking in possible tariffs..." It's anticipating tariffs on the import of foreign gold into the United States. (We import a lot of gold, mostly from Canada [1].) [1] https://oec.world/en/profile/bilateral-product/gold/reporter/usa https://oec.world/en/profile/bilateral-product/gold/reporter...
grandempire 2y ago
One thing I think crypto has been good for is it’s gotten a lot of people to think much harder about the nature of money. It’s so easy to spot incentive problems like this and communicate their seriousness to the public.

by fuoqi 2y ago

secondcoming 2y ago

This theory came up years ago when sites such as ZeroHedge were claiming JP Morgan controls a precious metals international scam and there isn’t enough physical gold or silver to cover everything. People were told to buy as much physical gold and silver as possible because it was all about to burst. Silver went to $50 and then collapsed and it was never mentioned again. Is this theory back doing the rounds?

zoklet-enjoyer 2y ago
Never mentioned again? You haven't been on the right parts of the Internet. It's still a common belief. Probably true too
fuoqi 2y ago
The difference now is that professional market participants act on this "theory" by physically moving a significant amount of gold from UK to US. And "weeks-long" withdrawal queues certainly do not look great and confidence inspiring. And there is the example of Poland which has repatriated all of its gold from UK years prior and stories like this: https://x.com/SenatorRennick/status/1891051795159429514 https://x.com/SenatorRennick/status/1891051795159429514
- secondcoming 2y ago
  And yet this physical transfer of gold has had largely zero impact on the price of gold. Nobody was fretting about 'where will we source Poland's gold?'
  - wrfrmers 2y ago
    Well, there's the notion that price no longer quite reflects what's going on under the surface. Certainly, it's in the interests of an entity experiencing a run on its reserves to do everything it can to obfuscate any indication that a run is taking place, including suspicious price shifts. Perhaps it's even more suspicious that such clear movement isn't being reflected in price volatility. If there were no trouble, a small shift reflecting physical movement wouldn't be too dangerous to allow to happen. But what if it wouldn't be a small shift?
unyttigfjelltol 2y ago
>there isn’t enough physical gold or silver to cover everything What does this even mean in the context of trading derivatives of commodities? Of course there isn't, people financed other purchases by borrowing precious metals and selling them, or trading futures on margin with no physical position. Isn't that literally what this market is? And, like it or not, it's the endpoint for all holdings of non-productive assets. Lease the metal back to traders and make 1%; hold it and pay 1% in storage fees.
suraci 2y ago
I do suspect BoE doesn't have enough gold to deliver now, it looks like so
- koolba 2y ago
  It’s also standard practice to delay or slow walk withdrawals when you know they’re going to run you dry.
  - cturner 2y ago
    There may be practical issues that explain delays. Consider a team who are staffed to suit normal activity. Then there is a period of increased activity, the team fall behind.

HWR_14 2y ago

If there wasn't enough gold in London, wouldn't that mean that gold claims there would be more valuable, not less? Because in order to fulfill the delivery they will have to repurchase the gold, creating huge demand.

fuoqi 2y ago
I do not understand your logic. Imagine I have 1 gold bar and issued 100 paper claims on it. How would one claim worth more than one physical gold bar? After someone retrieves the bar, I will have zero gold bars and 99 claims. Would you buy such claim knowing that I do not have any gold in my vault? It may not be even an outright scam. Those 99 claims may be backed by claims on someone else's gold, but it's likely I will not be able to exercise those claims in a timely manner, making me insolvent. Thus we have a "bank run" situation.
- HWR_14 2y ago
  I mean, if it's oversubscribed by 100x the amount in existence it complicates things (unless the issuers have 100x the value of their gold in other assets). But if you issued 100 claims on 99 bars, clearly one person is getting something else. If I offer to sell you my paper claim for 2x what it was worth yesterday (for example) then you lose the value of 101 bars of gold after selling 100 bars of gold (net negative 1 bar) and I make a tidy profit. Just like a short squeeze sent GME to $400/share.
- weitendorf 2y ago
  OP is assuming the oversubscription is due to counterparties being on the hook for gold they are obligated to deliver at a certain time (this is commonplace with commodity derivatives, you simultaneously create contract to buy a certain amount of a commodity at a certain time in the future + a contract to sell a certain amount at the same time in the future - they cancel each other out), not that the entity holding the gold fradulently issued more claims than they could deliver on. So OP is saying that if more gold was redeemed than expected, the counterparties to those claims would be forced to buy gold at whatever the price it ultimately settles on to fulfill the contract. Of course the problem is that there is such a thing as counterparty risk. If delivering the contractually obligated gold bankrupts an individual counterparty, or is physically impossible in aggregate (eg more claims than gold exists) then the contract won't be fulfilled at least for someone. But there is a lot of complexity here because not all futures are settled physically (they can be cash-settled) and there could be mechanisms in place to manage counterparty risk at various levels, like at the exchange, eg https://www.cmegroup.com/education/articles-and-reports/counterparty-credit-risk.html https://www.cmegroup.com/education/articles-and-reports/coun... I wasn't able to read the article because of the paywall but stuff like this is why regular joes tend to think there are bigger problems with gold or finance in general than there actually is. "There is more paper gold than physical gold" - regular Joe thinks there is a problem. "Actually the paper claims' settlement are subject to various conditions, typically closed out before taking delivery, and there is a complex system in place which does its best ensure that anybody who actually wants to take delivery or settle their contract gets it settled as expected" - regular Joe lost interest and went back to doomscrolling.

JumpCrisscross 2y ago

> why this spread exists "...when prices on the Comex surged above those in London late last year, baking in possible tariffs..." It's anticipating tariffs on the import of foreign gold into the United States. (We import a lot of gold, mostly from Canada [1].) [1] https://oec.world/en/profile/bilateral-product/gold/reporter/usa https://oec.world/en/profile/bilateral-product/gold/reporter...

grandempire 2y ago

One thing I think crypto has been good for is it’s gotten a lot of people to think much harder about the nature of money. It’s so easy to spot incentive problems like this and communicate their seriousness to the public.