by David Jensen, Jensen’s Economic, Precious Metals, & Markets Newsletter
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What Is the Market Telling Us?
Since the transfer of oversight of the London Gold Market and London Silver Market to the Bank of England in 1986, these markets both moved rapidly to trading promissory note cash/spot contracts for gold and silver.
The rub with these cash contracts for immediate ownership of gold and silver is that they are unallocated – each of the contracts were backed with promises to deliver metal to the holder on demand but are not backed by any specific bars of metal.
The London market has thus operated until now on the basis that the seller of the contract pretended to sell metal to the buyer, and the buyer / holder of the spot contract pretended to buy metal in the City of London’s cash metal market.
This system of metal leverage can appear to function so long as metal delivery demand does not exceed metal available for delivery – except that is happening today.
TRUTH LIVES on at https://sgtreport.tv/
With an estimated 400 million (M) oz. of gold spot contracts issued into the London Gold Market, there is an enormous amount of notional wealth tied-up in these promissory notes. Holders include sovereign wealth funds, hedge funds, family offices, industrial metal users, investment funds, etc. This is no small matter.
Since early December 2024 approximately 18M oz. of gold have been imported into New York vaults. This demand from New York for bar delivery has thrown a wrench into the London Gold Market’s function creating the demand for an enormous amount of leased gold that has driven the gold lease rate over 10% in London and causing the BoE to push-out gold deliveries to market to 8 weeks in comparison to the normal few days.
Leasing of gold is what the issuer of a cash/spot contract does when they are required to make delivery against a cash contract but do not have or are unable to purchase adequate gold to settle the contract in the short term.
According to a London Bullion Market Association (LBMA) expert panel discussion to clarify and explain the current London dynamics and dysfunction, approximately 1/2 of the gold imported into NY vaults since early December has come from London.
The net signal then is that 9M oz. of London gold delivery demand over a 2 month period has distressed the London cash gold market.
The LBMA discussion is a must listen: https://www.lbma.org.uk/articles/gold-market-dynamics
The panel clarifies that the demand for delivery of physical gold to NY from elsewhere in the world is due to tariffs, is 1/2 due to tariffs and 1/2 due to other things, is due to 10 to 15 things.
It is also stated by panelists Adrian Ash and LBMA CEO Ruth Crowell that there is no shortage of gold in London.
The key of course is how much actual physical gold liquidity is available to market to settle the estimated 400M oz. of cash/spot gold contracts estimated to exist in the London market. There is certainly lots of gold in London vaults however market signals such as the London gold lease rate indicate that very little gold is available for delivery to settle these cash contracts.
9 Million Oz. Down, 391M oz. To Go
The holders of the other 391M oz. of cash/spot gold contracts find themselves in an unenviable position. The market has sent a signal regarding the lack of liquid physical gold available to settle delivery demand in the London market.
One solution is to approach one of the world’s gold refineries to acquire gold while quietly selling the London cash contracts over time – simply leaving the paper to circulate. The 7 major Western refineries have refining capacity of 160M oz. per year, however the majority of their forward gold production is spoken-for well beforehand.
If this draw of London gold into the US and then other countries continues over time, the market will be making clear that it is shutting-down the leveraged London cash gold (and silver) markets.
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