BoE’s Announcement
Last Wednesday, the Bank of England (BoE) confirmed that it would require 4 to 8 weeks to deliver the gold currently awaiting shipment.
Background
Even before his election, Donald Trump had signaled his intent to impose tariffs on all imports. While details were unclear, many investors anticipated a surge in precious metal prices.
Following Trump’s victory, the COMEX faced an unprecedented spike in gold delivery requests. This led to a massive airlift of 393 tonnes of gold from the London Bullion Market Association (LBMA) vaults in London to the COMEX vaults in New York, increasing New York’s gold reserves to 926 tonnes. This large-scale transfer depleted the available gold liquidity in the BoE’s vaults.
Possible Default?
Market analyst Andrew Maguire has long warned that the Exchange For Physical (EFP) mechanism, which links COMEX to the London Bullion Market, mandates gold delivery within 14 days. He even raised this concern before the UK Parliament.
The BoE’s 4-8 week delay is, in essence, a default—even if the term is avoided. To address this, the BoE has reportedly asked other central banks to lend it gold that is supposedly stored in its own vaults. (Reuters)
Crisis of Confidence
This situation casts doubt on the transparency of the London gold market and the LBMA’s reported gold reserves. While public figures suggest large gold holdings, much of this gold is tied up in ETFs, central banks, family offices, and Chinese institutions—leaving little truly available for sale.
A similar issue exists in the silver market. Analyst Ronan Manly estimates that 85% of London’s silver reserves belong to ETFs, raising concerns about actual market liquidity.
If the BoE fails to meet its gold delivery commitments, the entire financial system—built on trust—could be shaken.
Impact on the Bond Market?
Adding to the instability, the BoE recently implemented extraordinary security measures for the UK’s government bond market (“Gilts”). This suggests the central bank is already bracing for a broader crisis of confidence. (Reuters)
The “Paper Gold” Problem
Each day, 20 million ounces of gold trade on the London market, with 27 million ounces on COMEX—roughly a year’s worth of production changing hands in a single week.
However, 96% of this volume is “paper gold”—contracts with no physical backing. When the remaining 4% of actual gold is exhausted, what happens next? Could Trump’s tariff-driven market turbulence trigger a systemic breakdown?
China’s Role
Chinese banks have been encouraging clients to hold gold instead of yuan, fueling substantial demand. In response, China has been purchasing gold from London since November 2024.
Notably, Chinese banks have acquired vaults in both London and New York and are accredited by the LBMA. Some of their gold is melted in Switzerland into 1-kilo bars for Shanghai’s physical gold market (SGE), while other reserves remain in Western vaults—potentially creating a false perception of available Western gold stockpiles.
Unlike Western markets, SGE mandates same-day delivery upon sale, ensuring that all transactions involve actual gold, not paper contracts.
If Chinese banks were to demand delivery of their gold from London or New York, during an already volatile period, the entire Western paper gold system could collapse.