What if I told you the scandal engulfing the gold market is really just an HR blunder?
Not only is the allegedly missing gold safely stored in the vaults of the Bank of England, but the conspiracy theorists have completely missed the real conspiracy playing out beneath their noses…
What leads me to this rather odd conclusion? No, not my firm belief in the capacity of HR departments to cause trouble.
Hanlon’s Razor is an adage that you should never attribute to malice what can be explained by incompetence. It’s called a ‘razor’ because it’s a tool philosophers use to get rid of unlikely explanations for a phenomenon that needs explaining.
Hubble’s Razor is a variation of Hanlon’s. It applies to the conspiracy theories currently raging in the gold market: ‘Never attribute to conspiracy what can be explained by incompetence, especially when it comes to the Bank of England.’
This is ironic given I believe the inflationary burst of 2022 was a deliberate policy on the part of central bankers including the Bank of England. They were trying to inflate away government debt. So, I don’t shy away from controversial accusations when I have supporting evidence.
But when it comes to the latest gold conspiracy, even I’m giving them the Bank of England benefit of the doubt.
To be fair, plenty of conspiracy theories about the gold market have proven to be true over the years. Some even resulted in trials and arrests. Others have forced embarrassing admissions from the mainstream media.
But that doesn’t mean everything in the gold market is a scandal waiting to be uncovered. Unless you think scandalously bad logistics rate…
Today, let’s take a closer look at the conspiracies being bandied about in the gold market. And try to sort fact from fiction by applying Hubble’s Razor.
But first, you need to understand what triggered this mess in the first place.
A run on the gold market?
When the tariff man Trump began to dish out trade war policies like Oprah Winfrey dishes out cosmetics, it caused a conundrum for gold investors. Would their favourite precious metal get caught up in the fray?
A gold bar in London is worth less than a gold bar in New York if Americans have to pay a tariff in order to get their hands on it.
And so a spread between the New York and London gold price began to open up on the mere chance this might occur. The New York gold price rose above the London one.
That spread woke up the arbitragers — a shady caste of Wall Street bankers who sleep most of the time but exist in two different places at once when they do wake up.
In this case, the arbitragers began buying gold in London on the cheap and selling it in New York at a higher price. Their profit was the difference between the two prices of gold.
The cost of doing business? The price of a trans-Atlantic flight ticket for their favourite pet rock. It also likely had to transit at a refinery in Switzerland to get into shape for the American market. More on that later.
Usually, an arbitrage like this disappears quickly. The very act of buying cheap London gold and selling expensive New York gold causes the prices to converge. But that didn’t happen, for various reasons we’ll also get to.
Instead, the arbitrage got a bit out of hand. It completely swamped the Bank of England’s vault logistics. One deputy governor even complained that he couldn’t get to work because a lorry was blocking the entrance…
The delays in getting gold out of the vaults is what has the conspiracy theorists in a frenzy. They claim the delays prove the gold isn’t in the Bank of England’s vaults at all. It has been lent out or sold…or perhaps it was never there at all?
The Bank of England is not running
out of gold
There’s no question the gold market is in turmoil right now. All sorts of symptoms are popping up. The real question is how you interpret them. Which is why you need Hubble’s Razor.
A bit like in epidemiology and economics, there are enough statistics floating around the gold market for everyone to reach whatever conclusion they had in mind when they first bothered to go digging. And nobody bothers to go digging in the gold market stats without an axe to grind.
But the underlying claim of the current gold market conspiracy is that the London gold market is running out of gold. Strangely enough, even what this actually means is completely up for debate.
For example, a vault that stores a customer’s gold must keep it there, unless the customer gives them permission otherwise.
But a bank selling an investor a position in gold needn’t necessarily have the gold itself. Just as a bank doesn’t keep all depositor’s cash on hand.
Not much gold trading involves actual gold changing hands. And even when it does, the logistics make it a royal pain in the neck.
For example, there are rather a lot of different types of gold bars. Bullion has different weights, shapes, sizes and fineness. Not all of it is standardised. Not everyone accepts the variations. You can’t sell the same gold bar in the London and New York markets, for example.
Believe it or not, the world’s gold refineries don’t sit around and wait for a spike in demand to ramp up production. So, if gold demand in the US suddenly does spike, causing a migration of gold from London to the US, then refineries can become a bottleneck.
According to the Bank of England itself, the big issue is finding the bars. This might sound a bit odd, let alone suspicious. But the BoE explained why more than a decade ago.
Its vaults use a bookkeeping system for who owns which bars of gold. The trouble is, there’s so much buying and selling going on that people end up with their bars distributed all over the vault. Collecting them for a withdrawal is a cumbersome process. Suddenly collecting significantly more than usual leads to delays.
So it’s all a simple matter of HR. You don’t hire and fire people based on demand spikes and lulls. Especially when you’re running a gold vault…
There’s an irony in all this. The bigger the delay in being able to get your gold out of a vault, the less that gold is worth. And so the arbitrage opportunity persists and worsens itself.
The real story
There’s plenty more going on at the Bank of England and in the gold vaults. But it’s just not as exciting as conspiracy theorists make out.
So, let’s move on to what’s really driving the gold price…
For years now, conspiracy theorists have alleged China is buying vastly more gold than official statistics suggest. Some claim to have found proof in the world of accounting, customs documents and ledgers.
If they are correct, I’d argue this explains why the gold price is surging.
You see, arbitrage has a net nothing effect on the price of gold. You buy in one place and sell in another. The price converges and the two trades cancel each other out. No real impact on the price of gold, nor supply or demand.
But when China buys tons of gold and puts it into a vault, that’s a market mover. It also puts a strain on the logistics of the gold market.
But what’s the real story? A lack of weightlifters hired to work in a London vault, or the secret purchases of tons of gold driving up the gold price?
Perhaps both are wrong. And this is what investors should be focused on instead if they want a chance to benefit from the gold bull market.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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