Authored by Armin Sidhu via The Mises Institute,
Gold has nearly doubled in two years. Silver has outpaced it. For the commodity that backed money for most of human history and that central banks still treat as the final settlement asset,these moves should represent a clean signal about physical scarcity and monetary demand. Western gold prices no longer carry that information cleanly.
The prices quoted in London and New York are increasingly detached from the physical reality of who owns what gold, where it sits, and whether it can be delivered on demand.
What looks like a bull market is the early indication of a pricing system failure.
Western bullion markets operate on a credit model. The London Bullion Market Association (LBMA) runs the largest gold market in the world, but most of the gold traded there is held in what the industry calls “unallocated” accounts.This means the customer holds a paper claim on a clearing bank rather than title to a specific bar in a vault.
When an investor buys an ounce through an LBMA member bank, the bank records a liability on its balance sheet and does not transfer ownership of any particular piece of metal. The Commodity Exchange in New York (COMEX) works on similar principles for futures contracts. Historically, fewer than one percent of COMEX contracts ever resulted in physical delivery. The rest were closed out or rolled forward as bookkeeping entries.
Eastern bullion markets operate on a property model.The Shanghai Gold Exchange (SGE)—the largest Asian gold venue and the operational arm of China’s central bank for physical gold—requires sellers to deposit physical metal before trading and buyers to pay in full upfront. More than 90 percent of SGE spot contracts result in actual delivery of actual bars.
The Shanghai Futures Exchange—the second major Chinese precious metals venue—operates on similar physical-first principles for its gold and silver futures. India’s retail and institutional buyers import and hold physical metal directly. Dubai’s trading hub treats allocated, segregated storage as the default condition rather than the premium option.
This difference reflects a philosophical choice about what gold is.Western markets have built their infrastructure around credit claims on pooled metal. Eastern markets have built theirs around title transfer of specific bars. The size of the gap between those two systems’ prices is now the most important indicator in the global bullion market.
Figure 1: Shanghai Gold Exchange premium over London spot gold at selected moments, 2023-2024.
Source: ZeroHedge News
