Ongoing Physical Gold and Silver Drain in London Pressures Prices Higher

The flow of physical gold and silver from London to New York continued last week, with JPMorgan announcing plans to move $4 billion in metal to deliver against futures contracts. Meanwhile, big players in the gold market are reportedly begging central banks to borrow gold stored in London vaults to fulfill the surging demand for physical metal. 

According to Bloomberg, JPMorgan was among several financial institutions that announced plans to deliver bullion contracts traded on the COMEX. The delivery announcements totaled 30 million ounces of gold, the second-largest level of planned deliveries since 1994. 

The prices of gold and silver futures traded on the COMEX have surged above the spot price of gold in the London market. Mainstream analysts blame the dynamic on the threat of tariffs pushing the futures price of gold (and silver) higher in New York, but as Chris Powell reported, there could be a more fundamental issue at play: the fact that there is a lot more paper gold than physical metal. 

Powell asked a key question to consider: 

“What if there really is just an ordinary shortage of gold? Or, to be more precise, what if there is a shortage of gold under U.S. and U.K. control relative to rising international demand for the safe-haven metal?”

Futures Market Imbalance

Regardless of the reason, physical metal is moving out of London into New York because of the price dynamics in the futures market.

Even though the price of gold surged last week and set new price records above $2,800 per ounce, the premium on the COMEX has created an arbitrage opportunity that big institutions capable of quickly moving metal between trading hubs can take advantage of.

According to Bloomberg, JPMorgan issued delivery notices for 1.485 million ounces of gold to meet physical delivery for the February gold 100-ounce contract. Deutsche Bank AG, Morgan Stanley, and Goldman Sachs Group Inc. made up the bulk of the rest.  

Bloomberg reports a similar dynamic in the silver market, with traders flying silver into the U.S. as well. This rarely happens because of the much lower silver price and the fact that it is bulky and expensive to transport. One industry veteran said this is the first time he’s seen the movement of physical silver at this level.

Dynamics in the futures market and the increasing price discrepancies are driving this movement of metal. 

A futures contract is a legal agreement to buy or sell a specific amount of metal at a predetermined price on a future date. Speculators can use the difference between the contract price and the actual price at the time of delivery to make a tidy profit (or lose a lot of money). 

Generally, these trades are made on paper. There is a legal obligation to deliver metal at the close of the contract, however, metal rarely changes hands. Both parties generally close their positions before the expiration date by selling (if they initially bought) or buying (if they initially sold). Contracts can also be settled in cash. Only about 1 percent of COMEX trades typically go to delivery.

The opportunity to deliver cheaper London gold to fulfill more expensive COMEX futures contracts is creating a nice profit opportunity for the big banks able to move the metal.

The Gold and Silver Shortage

The movement of gold and silver out of London vaults is becoming problematic.

This issue here is obvious. As metal flows out of London into New York, at some point, the gold and silver holdings across the pond will become depleted. As we reported a couple of weeks ago, this dynamic is creating significant uncertainty in both the gold and silver markets.

“This dynamic is having the effect of draining London vaults of gold and silver at an unusually fast rate –and at some point, these lower levels of vaulted metal in London could create price dislocations in that major market too. Those who have short positions in the New York market are in the process of getting squeezed, especially if they are having trouble getting their hands on physical metal to deliver into their short positions. Or get it into the right form.”

This squeeze is likely one of the factors that pushed the spot price of gold to record levels last week.

According to a Reuters report, bullion market players in London are racing to borrow gold from central banks that have metal stored in London vaults to meet the physical demand for metal.

As an analyst explained to Reuters, “The key with the BoE is that they are not a commercial vault so not prepared to handle the onslaught of gold borrowing banks are requesting from the central banks.”

The Bank of England stores a significant amount of gold for foreign central banks. Sources in London say the wait time for gold to be moved out of BoE vaults typically runs a few days to a week. Recently, the minimum time to load out gold has risen to as long as four weeks.

According to the Reuters report, there has been a significant drop in the size of the so-called Loco London free float representing the amount of metal readily available to the London over-the-counter market. Meanwhile, 12.2 million ounces of gold were delivered to COMEX-approved warehouses, raising stocks by 70 percent, the highest level since August 2022.

An analyst told Reuters that there are also liquidity challenges at other large trading hubs globally, although less pronounced than in London.

"The logistical complexities of moving large quantities of gold, particularly from Europe to the U.S., are amplifying these stresses. Asia has also seen some knock-on effects, particularly in markets like Singapore and Hong Kong." 

If this gold and silver squeeze continues, it could put additional upward pressure on gold and silver prices. It’s definitely a dynamic investors need to keep their eyes on.

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