[MACRO Trends] London gold market under pressure, supply constraints and emerging market hoarding create a squeeze

Recently, the global gold market has shown a series of significant dynamic changes, which has attracted widespread attention from the market. Bloomberg macro strategist Simon White noted that retail traders in the United States, Europe and other parts of the world have failed to take full advantage of the gold squeeze caused by emerging market central banks hoarding gold, in stark contrast to the performance of Asian markets.

Gold prices are currently hovering near all-time highs, with a one-year return of 44%, far exceeding the S&P 500. White believes the most plausible explanation is a shortage of physical gold in European vaults, driven mainly by hoarding by emerging market central banks. Central banks in Asia and the Middle East have been actively accumulating gold and shipping it back home from London since the global financial crisis, and especially since the outbreak of the Russia-Ukraine conflict. It is worth noting that the same dynamic applies to silver, whose price has begun to catch up with gold's gains after a period of lag.

Amid the gold rush, Western retail investors have reacted relatively coldly, a stark contrast to past situations. Holdings of gold-backed ETFs, such as GLD, which are often viewed as a measure of retail investor enthusiasm, have underperformed over the past year. At the same time, the growth rate of gold ETF holdings in Asian markets, especially India and China, has significantly exceeded that in Europe, the United States and other regions. However, Asian ETF buying may just be the tip of the iceberg as total gold holdings in European and U.S. ETFs remain higher.

Asian buyers generally prefer to hold physical metal rather than paper certificates. China and India are the two largest sources of demand for gold bars, coins and jewelry, according to the World Gold Council. While Western retail investors have been lukewarm about gold’s recent gains, perhaps due to greater attention paid to “Mag 7” stocks and Bitcoin, Asian buyers are holding on to the yellow metal, a strategy that has been successful so far.

The London gold market is under pressure as delivery delays from the Bank of England's vaults have stretched to four to eight weeks from the usual two to three days, a sign that the world's largest gold center is struggling to meet market demand. In the past two months, 12.2 million ounces of gold have been shipped from London to U.S. COMEX vaults, driven largely by concerns about U.S. import tariffs, a rush for physical gold and an impending supply crunch. Data shows that as of December 2024, there are 279 million ounces of gold stored in London vaults, but only 36 million ounces of them are immediately available to the market, while there are still 380 million ounces of unfulfilled spot contracts. The liquidity shortage is evident, with not enough discretionary gold available to meet demand.

Bank of England Governor Andrew Bailey was grilled on January 29 about the liquidity of gold reserves in London, but his evasive response only fuelled market speculation. Gold spot prices are surging as supply tightens and delivery delays increase, with buyers scrambling for fewer available bars, pushing spot prices higher. Analysts warn that the tensions are only just beginning and that gold prices could climb further in the coming months as central banks, institutions and retail investors compete for dwindling supplies. Meanwhile, Singapore’s gold exports to the United States climbed to their highest level in nearly three years in January. Data from the Singapore Economic Development Board showed that the amount of gold shipped from Singapore to the United States last month grew 27% from the previous quarter to about 11 tons, the highest level since March 2022.

Normally, Singapore's gold exports mainly go to Asian destinations, but recent turmoil in the global gold market has led to a widening premium of New York gold futures over London gold, attracting a large amount of gold into the United States. Nikos Kavalis, managing director of precious metals consultancy Metals Focus Ltd., noted that Singapore's gold bar exports mainly go to various parts of Asia, depending on where demand is better. When there is insufficient consumption in the region, the gold bars flow to London. But now, gold is being shipped to the United States from everywhere there are refineries. U.S. gold stocks have more than doubled since Election Day, with the value of gold in U.S. vaults now around $106 billion, compared with about $50 billion on Nov. 5.

The huge premium between gold futures prices on the New York Mercantile Exchange (Comex) and the spot gold price in London has attracted some of the world's largest financial institutions to arbitrage in the gold market. JPMorgan Chase and HSBC were identified as the two largest players in the transatlantic gold migration. The banks often lend their gold, much of which is stored in London, to borrowers who need the bullion as collateral, hedging against a fall in the price of the underlying asset by selling gold futures in New York. This means that the banks are effectively short gold, even as the price of the metal has surged by around 45% over the past 12 months.

Typically, traders have no intention of taking delivery of physical gold, but instead close their positions by buying futures contracts. However, some traders have found that it is more cost-effective to pay for the transportation of gold rather than take a loss. That’s why JPMorgan is reportedly set to deliver more than $4 billion worth of gold bars to New York, while HSBC is also shipping a large number of bars. These banks shipped gold not only to cover losses but also to take advantage of arbitrage opportunities. A gold bar stored in New York has the same intrinsic value as one stored in a vault in London, but currently fetches a higher price in the United States.

To sum up, the global gold market is undergoing significant dynamic changes. From the hoarding behavior of central banks in emerging markets to the liquidity crisis in the London gold market, to the surge in gold exports from Singapore to the United States, these phenomena all show that the supply and demand relationship in the gold market is undergoing profound adjustments. Whether this crisis escalates or stabilizes, one thing is clear: the demand for real, tangible gold has never been stronger.