Are Paper Gold Markets in Serious Trouble? (Uncut) 02-09-2025

Are Paper Gold Markets in Serious Trouble?

At the end of January, gold shattered its previous record, soaring to an all-time high of $28.15 per troy ounce. It was a week of wild swings, shaped by a perfect storm of economic pressures. Looming tariffs, a weaker-than-expected fourth quarter GDP report, a Federal Reserve interest rate announcement, and a declining dollar.

But behind the scenes, there’s something deeper at play. A crucial mechanism in the gold market, the kind that usually operates in the background, unnoticed, has begun to break down. And the fallout has left the London gold market scrambling to meet its obligations.

Meanwhile, as we finalize this video, the Trump administration is on the verge of announcing its next moves on trade agreements. Will new tariffs take effect? Will they be postponed? With global markets hanging in the balance, we’re taking a closer look at how these unfolding events are impacting gold, and what it all means for you. If you enjoy uncovering the hidden stories behind gold and silver, take a moment to hit that subscribe button.

This small act of support makes a meaningful difference in keeping this channel going. Thank you. Long-time gold investors know how spot prices are set, but even seasoned veterans may not be aware of the intricate mechanisms and long-standing traditions that keep the gold market running.

Right now, pressure is building on some of the most fragile parts of this system, pushing gold prices higher and driving new record highs. The proof is in the numbers. Over the past few weeks, market data and economic announcements that would typically push gold prices down have been piling up.

The most recent CPI report showed inflation rising to 2.9%, lowering the likelihood of a Federal Reserve rate cut. Lower interest rates usually boost gold prices, so in theory, the opposite should be true. Higher rates should put downward pressure on gold.

And yet, despite the Fed signaling a pause in rate cuts on January 29th, gold continued to climb. This seemingly contradictory rally points to stress in the futures markets, where gold is primarily traded. Gold futures are contracts that allow buyers to lock in a future gold price, offering financial institutions, the Goldman Sachs, exposure to gold without requiring them to physically hold it.

Most of the time, these futures are just paper contracts, endlessly traded or rolled forward without anyone actually taking delivery of the metal. But gold pricing isn’t just dictated by futures trading. There are two major gold markets that operate differently but remain deeply interconnected, the COMEX in New York and the LBMA in London.

COMEX is a futures exchange where gold is traded through standardized contracts, primarily for hedging and speculation. Most participants never take delivery of gold. Instead, they buy and sell contracts that can be cash settled or rolled forward.

The LBMA, by contrast, operates as an over-the-counter market where gold is directly traded between central banks, refiners, and bullion banks. It is the heart of the physical gold market, where large-scale transactions take place outside of a centralized exchange. Despite these structural differences, the two markets are linked through a key mechanism, exchange for physical, or EFP.

This system allows traders with COMEX futures contracts to swap them for physical gold in the London market, ensuring liquidity between paper and physical gold markets. However, with stress mounting in both markets, that process is becoming more difficult. To ensure the global gold market has adequate liquidity, swap lines exist between COMEX and the London Bullion Market Association.

These transactions allow gold to move between futures and physical markets, but with tightening supply in London, the system is under increasing strain. Tariffs pose a serious threat to EFP swaps. If gold is taxed as a commodity rather than recognized as a currency, the market could face massive losses.

To get ahead of this risk, COMEX has been stockpiling gold, reportedly amassing around $82 billion worth of the metal. But there’s a side effect. The London market is running dry.

Where deliveries once took just a few days to a week, reports now indicate wait times of four weeks. This growing delay is injecting uncertainty into the system, driving up costs and forcing institutions to brace for sustained disruptions. The effects are already rippling through the market.

For retailers like APMEX, the cost of holding inventory has climbed as banks reassess risk, making financing more expensive. This, in turn, is widening the bid-ask spread on retail gold transactions. But it’s not just retailers feeling the pressure.

Price discrepancies between U.S. and London gold are becoming more pronounced. Today, COMEX gold is listed at $28.33 per ounce, while LBMA prices are at $27.87, a $46 gap. Across the supply chain from refiners to wholesalers, disruptions are mounting.

If the London market reaches a point where it can no longer meet contractual obligations, the fallout could be significant. First, instability in the paper market may drive more investors toward physical gold, pushing up costs across the board. Sourcing inventory would likely become more difficult, with bulk gold increasingly reserved for those with stronger financing and industry connections.

As retailers pay higher premiums, customers will inevitably see those costs passed down. A prolonged liquidity squeeze could also push the gold market into backwardation, a scenario where spot prices exceed futures prices, signaling a supply shortage. Typically, gold trades in contango, where futures are priced higher than spot due to storage and financing costs.

But if supply constraints persist, backwardation could become the norm, indicating a market under severe strain. Another looming risk is the potential impact on gold ETFs, particularly GLD, the largest ETF backed by physical gold. By design, GLD must hold enough gold to back its shares, but over 97% of its reserves are vaulted in London.

If LBMA liquidity continues to dry up, institutional investors may start converting EFT shares into physical gold, further depleting available supply and accelerating the crisis. Then there’s the issue of leverage. For every physical ounce of gold in exchange vaults, 124 ounces are traded on paper.

If confidence in futures markets erodes and investors shift their focus to physical metal, a squeeze could develop, triggering volatility and potentially breaking the current pricing model. Which raises the bigger question, what happens if gold pricing moves away from futures contracts entirely? Futures markets have long dictated gold prices, but if traders lose trust in these contracts, the physical market could take over as the primary driver. Instead of Colmex and LBMA setting the global benchmark, price discovery could shift to Zurich, Shanghai, or even a decentralized system of private transactions.

In that case, a two-tier pricing structure might emerge, one for paper gold and another for physical metal, where premiums reflect actual supply constraints. If this transition occurs, the greatest risk isn’t just higher gold prices, it’s a crisis of confidence in gold pricing itself. Right now, traders and institutions operate on the assumption that Colmex and LBMA provide a reliable benchmark.

If that trust collapses, extreme volatility could follow, with gold moving toward a physical-only pricing model based purely on available metal rather than futures speculation. Such a shift could destabilize financial markets, especially if central banks or major institutions scramble to secure physical reserves. However, for those concerned about an imminent breakdown, there are reasons to remain measured.

Colmex has significantly bolstered its gold reserves, increasing holdings by 70% to prepare for potential disruptions. While the EFP swap system is under stress, it hasn’t yet broken, and past liquidity crunches have often led to stronger safeguards rather than collapse. Additionally, no official policy changes on tariffs have been enacted yet between the UK and the US.

Even if new regulations are imposed on metals or financial transactions, it could take months for the full impact to materialize, allowing time for adjustments. As for the LBMA, while it faces mounting liquidity challenges, it still possesses deep institutional relationships and a history of adapting under pressure. Markets are resilient, and uncertainty is often the biggest short-term disruptor.

Once the rules of engagement become clearer, gold markets, like all markets, will find ways to adjust. This situation is unfolding in real time, and our videos take time to produce. As of writing, we’re awaiting the Trump administration’s announcement on February 1st regarding the scope of potential tariffs as well as the release of the first notice-date report, which will indicate whether EFP requests are accelerating.

The gold market could shift between the time this video is written and when it’s published. Stay alert to the latest developments, and we’ll update the description if any major changes occur in the meantime. That’s all we have for you today.

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