THEY DON'T TELL YOU THE REAL REASON FOR FEBRUARY GOLD FLIGHT FROM LONDON TO NY

The London gold flight: a perfect storm of tariffs, arbitrage… and, of course, Trump — because who else?

Every pundit on print media, cable networks and online news outlets, and whatever experts, say Trump's tariffs is the cause for the massive flight of gold out of London to New York in February. In the absence of evidence, is that really the case? Could there not be any other explanation?

Pundits all say the fear of tariff and geopolitical risks made traders move their physical gold to COMEX. Just about everyone seems to accept this is the underlying reason, including subject matter experts. This is absolutely incorrect.

For commodities, an anticipation of tariff will cause prices in the futures market to decline. The reason is tariffs tend to dampen demand for the goods and slows down economic activities. The poor economic outlook causes hedgers and speculators with long positions to rush to sell, forcing futures prices down. Whether the spot market for these commodities will also decline depends on the inventory situation. If there is a huge supply, spot prices will drop. If the huge supply cannot be diverted to other markets fast enough, perishable commodities will see spot prices fall steeply. In the 2018 US-China trade war, when China imposed tariffs on US soybeans, futures prices plunged by about 20% almost instantly. Spot prices gradually followed as unsold soybeans built up in US silos. In 2022, sanction on Russian oil caused futures prices to drop — but spot prices stayed high initially due to supply disruptions. Only when inventories swelled later on did spot prices adjust downward.

Gold, on the other hand, behaves in the opposite direction. Anticipation of tariff (not necessarily a tariff on gold, but generally), gold futures tend to rise. Tariffs tend to dampen demand and the economy generally, at least in the short term, causing nervousness in various markets such as equities. Gold is a safe haven in times of uncertainty. Whether the spot price of gold will rise as futures rises depends on several other factors. This is because unlike commodities, gold reacts not just in response to immediate supply, but to financial flows which is impacted by investor sentiment, interest rates, and currency movements. Furthermore, unlike other commodities, physical gold supply is more or less fixed. Every ounce of gold that has been mined is still in existence, they are not consumed, other than a small fraction that goes into industrial products and jewelry. Generally, demand and supply affect the spot price of commodities. In the case of gold, supply is fixed. It is it's availability, that is, liquidity, that matters. That availability is subject to market dynamics in ways very different from other commodities. This I explain below.

Gold is a financial product, not physical goods like all the other commodities. In the history of international trade, no one except India has imposed a tariff on gold. But India is unique as far as demand of gold is concerned. 70% of India's gold imports go into jewelry (it's a big deal in weddings) and religious ceremonies. The tariff was to balance demand for a consumable good and foreign exchange concerns.

There is of course the possibility of embargo or sanction on gold tied to geopolitical conflicts or efforts to cut off financial support to targeted regimes. During WWII, the Allies imposed gold trade restrictions to prevent Nazi Germany from using looted gold to fund its war effort. During the 1980s, apartheid South Africa faced global sanctions, including restrictions on its gold exports. In 2018, the US blocked transactions involving Venezuelan gold to prevent Maduro from using the country's gold reserves to prop up his government. 

In the case of Russia, don't play play. It is the third largest producer of gold after China and Australia. A sanction on Russian gold is currently in place to prevent them using their resource to finance the Ukraine war effort. However, this sanction applies only to Russia's reserves and newly mined and refined gold. It does not include Russian gold already in LBMA (London Gold Market) and COMEX, the largest gold futures market in NY. The reasons for not interfering with LBMA and COMEX are due to practical, legal and market considerations. (1) Gold is fungible. It is melted, casted and re-casted and rebranded. There is no chain-of-custody, or blockchain technology, so it cannot be tracked to its origin. For example if there is tariff of gold coming into US from anywhere in the world, those gold may have US COMEX origin. It is a ridiculous situation of US tariff on itself. (2) LBMA and COMEX relies on "Good Delivery Standards" which means all previously accepted gold remains valid. (3) A ban will create massive legal contractual issues on all existing contracts, ETFs backed by physical gold, and all those gold already in the vaults of all industry players. (4) Most important of all, it would create a financial nuclear bomb as it first disrupts liquidity in gold trading hubs which distorts prices and then spreads panic across all sectors of the global financial market due to their interconnectedness.

It is for reason (4) above that a gold tariff will never happen. Trump is imposing a tariff on steel and aluminum for reasons of national security. The US needs to build its own steel and aluminum industry. Gold is not a metal as steel or aluminum as far as its function in the market is concerned.

Physical gold takes flight for fear of confiscation during war and in times of severe economic conditions. Nazi Germany seized gold from occupied countries. Looted gold were melted and rebranded by the Swiss. Stalin banned gold ownership by private individuals. Venezuela under Chavez and Maduro confiscated gold and nationalised gold mines. In 1959 Australians had to sell their gold to the central bank. In 1933 Roosevelt forced Americans to sell their gold, including paper gold, to the government for US$20.67/ounce. Gold was then revalued to US$35/ounce which devalued the dollar and boosted government reserves. This lasted till 1974. This is certainly not the geopolitics situation in UK currently where gold flees the country.

Now that we have taken the emotion, the Trump-hating, and the tariff and geopolitical nonsense out of the way, we can try to understand what actually happened in the London gold flight.

There is always a price differential between the London spot price and the futures price of gold in COMEX, NY. Ordinarily, spot prices are lower due to the carry cost of physical gold. These are storage, insurance and financing cost. Futures contract include this carrying cost which is why it is typically higher. This is a normal market condition called contango. The spot price is driven by market supply and demand dynamics. The gold futures market is driven by the spot price, expectations of various risk parameters such as inflation, interest rate movements, geopolitics, investor sentiments, etc, and more importantly, market speculators whose trades in non-deliveries impact futures prices.

Sometimes the futures price will be driven much higher than the contango, creating arbitrage opportunities. When such opportunities arise, bullion traders will buy spot and sell futures at the higher price, making an arbitrage profit. Arbitrageurs drive demand for physical gold, the spot price is pushed higher till the arbitrage opportunity closes. This is the normal dynamics of the market. Financial derivatives exploit price discrepancies, relying on the expectation of bullion traders to balance supply and demand across markets, thereby aligning prices. The arbitrageur benefits from the price correction facilitated by others' physical movements without engaging in the logistics themselves. This approach underscores the efficiency of financial markets, where price imbalances can be corrected through various mechanisms, not solely dependent on the physical transfer of gold. Physical gold may or may not be delivered in COMEX depending on the traders preference on method of settlement. In other words, arbitrage does not mean physical gold has to be shipped to COMEX for delivery

Gold price has risen 44% in the last 12 months. Currently it is at US$2,900+ level, the highest it's ever been in the last 5 yeas. There are several reasons for the bullish view on gold -- central banks have been on a buying spree since 2022, inflation, rising geopolitical risks in Europe, rise in USD interest rate, expectation of a valuation correction of equities, the impossible US national debt and anticipation of dollar's collapse, and fear of US tariff on the metal. But the long term trend is irrelevant to determining what happened in February. It is the supply and demand situation in the trading days in February.

In the week of Trump's inauguration, the spread hit US$60. This however, is not the first time the gold market has seen such a wide spread. The chart above shows the period of price dislocation between spot and futures. There are 4 distinct periods - 2019 (pandemic), 2008 (global financial crisis), 2001 (dot com bubble), and 1975-1990 (post gold standard era). In times of uncertainty, gold prices rise due to its safe haven reputation. These were times of uncertainty and money flows into gold. The spreads build up and arbitrageurs enter the market pushing up spot prices eventually smoothening out the gap. .In 1975 gold futures was launched, there was a long period of volatility. The spikes in the 4 periods mean there were arbitrage opportunities and it shows the efficiency of the pricing mechanism in the market as spikes eventually get even out. There were no flight of physical gold out of London in the earlier 3 events simply because there were sufficient physical gold in both markets to meet demand. In early 2020 also around February that year, there was a similar flight of gold out of London to COMEX. This was because the pandemic caused disruptions and huge delays in logistics and re-casting of physical gold in Zurich, forcing bullion banks in London to ship gold to NY.

February 2025 had the same spike pattern and huge spread, and same physical gold flight as in 2020. What happened in 2025 February cannot be attributed to fear of tariffs. Tariff is simply another factor that brings uncertainty to the market, just like pandemic, financial crisis, dot com bubble, which all tend to push gold prices higher with increased demand for physical gold and derivatives. .

By mid February, after the massive outflow of physical gold from London, the spread has dropped to US$28 level. This shows it is availability or liquidity of physical gold that allows the market dynamics to recalibrate the price differential. If there is no liquidity in physical gold in the futures market, traders move gold from LBMA to COMEX. This happens all the time as the spot and futures price smoothens out the price hikes and generally goes unnoticed. In February the scale of it and the clogged logistics blew the situation into public awareness.

Almost all traders close out their futures positions before expiration by an offsetting contract and take profit or loss. This is cheaper than taking delivery and bearing carry cost or buying spot to deliver.

To close out the futures short (sold) positions, the arbitrageur can (1) 'roll-over', that is extend his short position with a new sell contract.. Or he can (2) do a gold swap with a bullion bank. In both cases, there is no delivery of physical gold. The arbitrageur has (3) the third option of delivering physical gold. If he has no inventory in COMEX, he ships his gold from London to NY. Whichever option he takes, it is driven by cost consideration.

Rollover becomes more costly when the price between the expiring month of the contract and the next month is increased, ie the spread has grown larger. A swap is borrowing or leasing of physical gold to back a futures short position. The leasing cost rises when liquidity gets tight, ie there is lesser gold in the market.

For physical delivery, there are shipment, insurance and storage cost to consider. Previously, shipping gold from London to New York was very expensive because the two markets had different specifications. London gold bar is 400 oz each whereas COMEX gold bar is smaller at 100 oz. The gold had to be sent to Zurich to be smelted, re-casted, rebranded and assayed before it can be sent to COMEX. This added a huge layer of cost. In the Covid-19 pandemic, the logistical delays of shipping to Zurich made the mechanism inefficient for the market. There has since been an integration between LBMA and COMEX making the different gold bars acceptable to both markets. This drastically reduces the cost of transferring the physical gold.

So the answer to what caused the massive flight of gold from London to NY boils down to simple math. Physical delivery was cheaper than 'rolling over' the futures contract and gold swaps. That begets the question of what caused the other two options to be more costly. For that to happen, there must be what is known as a "squeeze" in the spot and futures markets. Now we are getting into the crux of the situation.

First, lets try to understand the physical gold supply side.

Bullion banks in London hold gold bars in their vaults. These holdings are split into 'allocated accounts' and 'unallocated accounts'. Customers who want ownership of their gold hold them in allocated accounts. These gold bars the banks cannot make use of. The banks are simply the custodians. The unallocated accounts comprise of the banks' own reserves and customers who keep their gold there but has no lots identified to them. They have no direct ownership. Their position is that of a creditor. Obviously it is much cheaper for customers to maintain unallocated accounts. The bank can lend gold out of the unallocated accounts and earn leasing fees.

The Bank of England's vault holds about 400,000 gold bars but owns only 2 nominal pieces. It serves as a custodian for UK's gold reserves of 310 tons, as well as for other central banks and financial institutions. It does not trade but serves as administrator for its customers who leases out some of their gold.

In NY, COMEX holds only a small portion of the gold. Most of their gold is in COMEX-approved vaults of bullion banks. COMEX gold is classified into 'Registered gold' which is gold tied to contracts and ready for delivery; and 'Eligible gold' that meets delivery standards but not yet available for trade.

NY bullion banks maintain their gold in 2 main categories -- (a) COMEX gold which they cannot make use of, and (b) 'Off-Exchange gold" which comprise of 'Allocated gold' of their customers and 'Unallocated gold" of their customers together with their own reserves. They also act as custodian of central banks gold as well as the reserves of EFTs (gold exchange-traded funds).

The Federal Reserve does not hold physical gold of its own. The US Treasury holds the governments gold but it does not participate in the gold market directly.

A 'short squeeze' is when short sellers find themselves with inadequate physical gold to deliver. Their position will be force closed by a call on their margins. A 'supply squeeze' is when the market itself has a shortage of physical gold to go around. When a supply squeeze occurs, prices rise and roll-over and gold swap options become more expensive and physical delivery becomes the choice of settlement. NY bullion traders are forced to ship their gold over from London to meet their obligation. This was exactly what happened. So we need to understand where the demand is coming from that caused the supply squeeze.

Pundits say the fear of tariffs caused traders to take gold delivery. Certainly the fear of tariffs increased the uncertainty and investors turn to gold. But it is not in the way most people think. There are a few ways this demand manifested. (1) First, investors with physical gold accounts stored in bullion bank vaults moved from 'unallocated' to more costly 'allocated' accounts' to gain ownership for better security. This decreased the float or liquidity, or supply of gold, ie the balances in unallocated accounts for bullion banks to lease out and liquidate their own short positions if any. (2) Increased uncertainty caused central banks to cut down on leasing activities thus decreasing the float to the market and increased gold swap costs, which in turn further increases demand for physical gold as arbitrageurs prefer delivery than roll-over or gold swap. (3) More prominently is the role of gold ETFs. Market uncertainty caused investors or hedgers to flock to paper gold by investing in gold ETF. These ETFs need to hold physical gold reserves to back their paper gold. Total holdings of gold by ETFs is about 10 times of UK's gold reserves. That gives an idea how big the sector is. In February huge inflows of funds into ETFs caused a substantial increase in demand for physical gold. For example, India, which is a huge consumer of physical gold, saw a huge inflow of US$456m in January into gold ETFs. (5) Lastly, arbitrageurs who had built huge short futures positions all rushed for physical gold to meet delivery obligations.

The supply of gold is fixed. The supply of gold available, ie the float represented in the 'unallocated accounts' of bullion banks and central banks, is much smaller. A supply squeeze happened in COMEX in February and bullion banks needed to transfer their gold from London to NY to meet their obligations. Clearly this had nothing to do directly with tariffs.

Lastly is a speculation, but a high possibility. Whenever there is huge financial upheaval, conspiracy theory involving Rothschilds arises. Not this time since the Rothschilds exited gold business a long time ago citing increased competition, increased risks and lowered earnings. London is the major physical gold market and the major bullion banks include JC Morgan Chase, HSBC, UBS, Scotiabank, Goldman Sachs, Standchart and ICBC-Standchart. London is an OTC (over the counter) market. So a lot of things these fellas do no one knows. Follow me now.

Fractional banking is a mechanism that allows commercial banks to make use of their customers' deposit money by lending them out and earn an interest spread. As money gets re-deposited, they can lend out again. So there is a multiplier effect. If they hold 10% reserves, every new $ deposited can result in $10 being created in the market. In other words, the banks can 'print' money. In a similar way, bullion banks can make use of physical gold deposited with them to 'print' much more paper gold in the futures market. This gives them a great ability to move markets.

Bullion banks have significant control over the paper gold or futures market which they have manipulated for decades. They flood the futures market with vast amounts of 'naked' shorts, meaning not backed by physical gold. This overwhelms demand and prices fall artificially which they then buy back. History is rife with such market manipulation. They are not worried of getting caught. The fines are nothing compared to the profits they can make. Examples of such manipulation:

- April 2013 over 400 tons of futures contracts were dumped in a few minutes which triggered stop-loss orders and gold crashed US$200 in 2 days even though there was strong demand for physical gold.
- 2020 JP Morgan was fined US$920m for fraudulent trading between 2016-2019. It's an illegal market manipulation called "spoofing" of placing large fake sell orders. When the price has gone down, they cancel the fake orders and buy at lower prices.
- Bullion banks can oversell on unallocated gold. They write more futures than their reserves of unallocated gold can support. If there is too much demand for physical gold, they delay payment or cash-settle at suppressed prices. This was what happened during the pandemic.
- Bullion banks are 'authorised participants' in gold ETFs like SPDR Gold Shares (GLD). They can issue or redeem ETF shares based on supply-demand. Thus they are in a position to influence gold flows. In 2013 GLD gold reserves fell by 500 tons which coincided with a gold price crash. This suggests ETF liquidation was used to supply physical gold and suppress prices.
- Bullion banks trade in derivatives instead of physical gold. They used gold swaps and forward contracts to delay physical deliveries thus preventing price hikes. Bank of International Settlement often collaborates in this to prevent prices from rallying. BIS conducts hundreds of tons of gold swaps monthly.

Looking at the history, it is very likely bullion banks were caught shorting the market leading up to February and frantically moving their gold from London to COMEX. Anyone caught with huge short positions in gold futures in January must have made tremendous losses.

Given the banks proclivity to short the market, one must ask why are governments not tightening regulations. Here we go into another probability of conspiracy theory. Governments do not want gold prices to rise, period. Governments (and central banks) prefer stable or moderate rises in gold prices for currency stability and economic perception:

- An increase in the price of gold is a double-edged sword for central banks. Its asset valuation has grown, but their fiat currency has depreciated.
- Gold competes with interest-bearing assets. Higher gold prices could push investors to dump bonds or currencies, forcing central banks to raise interest rates to stabilize their currencies — which can hurt economic growth. Keeping gold prices tame reduces this pressure.
- A soaring gold price can signal to markets and the public that something is fundamentally wrong with the economy or monetary system. To avoid panic, governments may prefer to suppress rapid gold price increases.
- Gold is traditionally seen as an inflation hedge. If prices spike, it might make official inflation report look suspicious.
- There is a geopolitical angle. High gold prices empower countries with large gold reserves like Russia and China and undermine confidence in US$ which is the major reserves currency. Controlling gold price volatility helps to protect the status of US$.

For these reasons, there is no doubt governments work in concert with bullion banks to prevent gold prices from rising too much too fast. Central banks play a crucial role in providing gold liquidity by leasing gold to bullion banks via BIS acting as brokers. The US Treasury does not lease out gold but it helps to control prices using its Exchange Equalisation Fund buying and selling gold. There exist an undeclared effort to suppress prices. There will never be a wild ride on gold prices like cryptos.

Those who doubt a bullion banks-government connection exist should recall an event known as "Brown's Bottom". This event outperforms Ho Chin's folly in 2009 when Temasek ill-timed the disposal of all those bank investments at a time when prices were lowest,  and sustained hundreds of millions in losses. In 1999-2002 Gordon Brown was Chancellor of Exchequer. As Treasurer, he sold 400 tons of gold which went mostly to China and other emerging markets. The idea then was gold was unnecessary to protect their fiat currency. It was to be monetised and invested in interest-earning assets and foreign currency reserves. That was IMF recommendation. Gold prices crashed. Bullion banks were holding huge short positions at the time, of course coincidentally, When prices crashed and hit rock bottom, bullion banks bought back cheap and made a market killing. Brown sold 60% of UK's gold reserves at rock-bottom price of average $257/oz, hence "Brown's Bottom". Peter's Principle prevailed and Brown went on to become UK's Premier in 2007.

What then caused the massive gold shipment from London to NY?  Was it Trump's tariffs? Was it arbitrageurs? Was it because bullion banks overtraded in paper gold in excess of their reserves? Was it Bullion banks out doing their national service shorting the markets to keep prices down and got caught in a supply squeeze? One thing is for sure, it was not due to COMEX traders want physical gold delivery because of the threat of tariffs.

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