A theory on Gold
The vaults are emptying. Why?
Good Morning Team.
I want to take you down the rabbit hole for this one. A fun bit of speculation about why the gold price is rocketing to record highs every other Thursday, and why.
Please bear in mind that I’m not saying this theory is true, or that the entire financial system is built on sand. I’m only saying that the traditional explanations of why gold is reaching record highs just don’t cut the mustard.
This is very much not financial advice, and please take this article with more than a pinch of salt.
Traditional economic theory argues that in times of economic stress, gold functions as the real asset inflation hedge and safe harbour of blah blah blah.
Because if you believe the theory, then there are two stores of value - Gold and USD. No Bitcoin doesn’t count, it’s at best a leveraged bet on the NASDAQ.
When USD gets stronger (tariffs, rate rises), gold falls because it’s a non-yielding asset. When USD weakens through rate cuts, gold rises.
But this received wisdom simply isn’t happening. Instead, gold has been rising with USD, which analysts agree is unusual. The educated guess is that gold is acting more of a hedge against systemic risks like de-dollarisation and massive global debt than in its expected role.
What we do know is that the rising gold price has largely been driven by central bank buying. In fact, central banks have been buying at a record pace over the past few years:
2022: central banks bought a record 1,082 tons of gold.
2023: central banks bought 1,037 tons of gold, the second highest annual purchase in history.
2024: central banks bought 1,045 tons of gold, slowed by record gold prices.
Surprisingly, 2024 was the 15th year in a row of net purchases.
Why are central banks buying? We’ll get to that.
COMEX Clarified
But first, you need to understand the basics of COMEX, the primary futures and options market for trading metals including gold. It’s going to be in the news a lot over the next few weeks - it’s a division of the CME (the Chicago Mercantile Exchange Group), and is effectively the centre of commodities trading worldwide.
And importantly, it offers gold futures contracts.
These are standard agreements to buy or sell gold under contract (usually 100oz) at a predetermined price and future date - used for both hedging (gold miners, jewellers and central banks) and speculation (hedge funds and retail).
You can also buy gold options, which can be super fun - but the basic point you need to ram through your head is that COMEX is the global benchmark for gold pricing.
If COMEX says gold is this price, that’s the price we all agree that it is.
Here’s the problem.
Futures traders almost always close their positions before expiration - you will have heard apocryphal tales of London traders having thousands of barrels of oil, or hundreds of pigs, dropped on their desk when they forgot to close a position. Incidentally, I’m pretty sure this has never happened, but would love a source if it has.
I digress.
While most gold futures traders close their position before expiration, you can settle in cash - and critically, you can INSIST on settling in gold stored in COMEX-approved vaults, as long as you use the right broker when placing the contract.
COMEX allows traders to trade on margin - borrowing funds you don’t have - meaning you can buy or sell an entire contract without physically having the capital for the full contract value.
If you look at the win rates by the way, this is generally not a good idea for your average Joe. Don’t try it - the house always wins, with your potential losses (and gains, LOL) massively magnified.
COMEX also trades 24 hours a day unlike the stock markets. Key activity occurs during the US market hours (14.30 - 21.00 UK time), but the market never sleeps. This is important for later.
Overall, COMEX is the trust underpinning the world gold pricing mechanism. It’s the most liquid gold futures market, and if you invest in gold, gold producers, or gold explorers, then it’s something you need to research and understand.
And the big problem right now (what is becoming a problem anyway) is that there is nowhere near enough physical gold to back all the outstanding COMEX gold futures contracts at any given time. The same is true of almost all futures markets, because COMEX, like all futures markets, operates on a fractional reserve system.
This means that the number of paper gold contracts (gold futures) far exceeds the amount of registered physical gold in COMEX vaults - such that outstanding gold futures contracts (known in the lingo as open interest) represent hundreds of times more gold than there actually, physically is.
Now there are two types of gold at COMEX: registered gold, which is explicitly for delivery against contracts. Then there’s eligible gold, which is stored in COMEX vaults and can be called on if needed and the owner agrees.
But the owner has to agree.
Here’s where it gets interesting. If a large number of traders demand physical delivery of their gold, this means you are either going to get a liquidity crisis, or a short squeeze, or both.
COMEX will initially delay deliveries, try to source gold from the eligible stockpile/elsewhere, or in a ‘worst’ case scenario settle in cash at a premium.
Which makes people want gold even more. Yes, COMEX can increase margin requirements - but this is not going to phase central banks wanting to actually buy gold.
And, I speculate, this is where we are right now.
COMEX is stockpiling gold in an attempt to hide what’s happening, but if Russia or China come along demanding physical delivery COMEX could run out of gold within minutes.
For reference, COMEX vaults now hold around 36 million ounces, close to the highest level ever. Insuring a larger stockpile costs more - they’re doing this for a reason. And once people realise COMEX is going to run dry, you’re going to see a classic bank run but in the form of the only money that’s actually real.
Yes, this seems counterintuitive, because there’s near record levels of physical gold in the vaults, but what’s happening is COMEX is desperately trying to meet physical demand without resorting to drastic measures.
If confidence in COMEX paper gold prices collapses, the price of real gold is going to rocket. And as it’s a 24h market, it could happen at any time.
South Korea’s Mint has halted gold sales due to tight supply and high demand, with no indication of when sales will resume.
As for the Bank of England? Threadneedle Street has an issue if a 2% drawdown in its gold reserves has caused a four to eight week delay. If there’s already significant withdrawals, there’s clearly a possibility that investors are worried the Bank will pause withdrawals.
And you know what?
A four to eight week delay is as good as defaulting on delivery when the gold price is as volatile as it is.
Perhaps they don’t have as much gold as they say. This is largely not relevant to the thesis.
But since November, 393 metric tonnes have been moved into the New York COMEX vault from London - driving New York COMEX inventory up 75% to 926 tonnes - and you can shout about tariffs as much as you want, this is in my view not about tariffs.
For perspective, at the start of the pandemic panic, 550 tonnes was transferred between March and June 2020. This was panic-induced.
February 2025 COMEX deliveries are now over 60,000 contracts and may reach a record 70,000+, representing over 200 metric tonnes. Open interest in the Mar25 contract continues to expand as well.
All the gold in the world is being sucked up by COMEX, and then being whisked away for physical delivery.
By who?
The Trump Factor
Here’s where it gets dicey.
Yesterday, officials in the Trump administration said that Trump is considering returning the US dollar back to the gold standard. This would allow USD to be directly exchanged for gold.
Also yesterday, Barrick CEO Mark Bristow advised in an earnings call that ‘gold is becoming reserve currency for central banks.’
Yes, you have the likes of John Stepek (excellent commentator) arguing that revaluing US gold reserves is Trump’s version of ‘mint the coin.’
This is a hypothetical whereby to avoid a debt ceiling crisis, the US Treasury could use a 1997 loophole by which it has the power to mint platinum coins of any denomination to mint a platinum coin with a face value of $1 trillion, deposit it at the Federal Reserve, and use it to fund government obligations without issuing new debt.
But the difference is that gold has real value, because it’s a physical precious commodity. If you bring back the gold standard and simultaneously revalue the US government’s gold holdings to market, you can probably add $1 trillion or so into the US treasury.
This of course would be massively, massively inflationary, but luckily enough, if this does send gold soaring, Trump can just revalue the gold holdings again 12 months later and spend even more money!
Jokes aside.
If this is happening (and put on your tin hats for a moment here), then let’s summarise.
All the gold is flowing from London and Korea and everywhere else into COMEX vaults in New York. At record levels. This is potentially directly because the US Treasury or the Federal Reserve is taking mass physical delivery of contracts.
All the gold the US government has either ‘lost’ or sent out into the world needs to come home, and it’s going to be used to bring back the gold standard.
USD massively devalues to improve the USA’s international competitiveness, combined with tariffs to both improve US productivity, but more importantly, to force other countries to accept what will essentially be a new currency.
USD has real value again, and the debt spiral is solved.
Of course, the Republicans have asked to increase the debt ceiling - some $4 trillion - but this is all part of the game plan to illustrate how unsustainable the system really is. Sovereign Wealth Fund anybody?
And if this is happening, then anyone who’s anyone knows about it. Especially other central banks.
The demand for physical gold is going to skyrocket.
The vaults are emptying, the central banks are buying.
This explains why.