(Bloomberg) — Every day in London, thousands of commuters on the Central Line take a subterranean detour around the Bank of England’s vast underground vaults, bringing them as close as they’re ever likely to get to the $500 billion of gold the bank holds on behalf of nation states, commercial banks and other financial institutions. Tube trains come so close that staff inside sometimes report hearing a dull hum as they pass.
Since January, the small team overseeing the reserves has had little time to take notice. They have been working flat out to do what the Bank describes as “digging out” gold bars for delivery to traders who’ve seized on a rare arbitrage opportunity thrown up by speculation that Donald Trump will impose tariffs on the precious metal, alongside a raft of other imported goods.
While the trades can be initiated with a click of a mouse, bullion bars have to be physically moved in such volume that it has exposed severe logistical bottlenecks in the global gold market. The Bank’s vault keepers are busier than they’ve been in years, logistics companies are working overtime, and refineries are booked out for months with orders to recast gold bars from London into a form that can be delivered into the US futures market.
The security of the vaults — proven over centuries — and how cheap it is to store gold there, relative to the commercial vaults that make up the rest of the London gold market, mean that holders rarely shift their bullion. But now, they are moving gold out at the fastest rate in over a decade. More than 20 million troy ounces, worth about $60 billion, have entered the depositories of New York’s Comex exchange since the day of the US presidential election, with much of it originating from the London gold market — the world’s largest.
The physical moves have become the talk of the market, where gold prices are hovering just below a record high of $3,000 a troy ounce. The rally — which has seen US gold prices rise faster than anywhere else — has in part been driven by concern that Trump’s America-first economic policy could weigh heavily on global growth.
It means that by buying spot gold in London and selling a corresponding futures contract in the US, traders were able to net a healthy guaranteed profit of about $50 an ounce — which could translate into hundreds of millions of dollars given the volumes involved. The New York premium has since narrowed to more-normal levels of about $10 an ounce, but a lot of gold still has to be withdrawn to meet the commitments of traders who sold futures in the US market.
To make the fullest possible profits on the trade, dealers at global bullion banks such as JPMorgan Chase & Co. and HSBC Holdings Plc are to a large extent relying on public-sector workers at the Bank of England who handle their requests to pull billions of dollars worth of metal from their vault.
“What’s happening in the London market is a short term logistical thing, but it’s having real consequences,” said John Reade, senior market strategist at the World Gold Council, the industry lobby group. “There’s not as much gold in London as normal, but again, there’s still lots there. And once it can get out from behind the Bank of England, then everything should calm down.”
The Bank declined to comment for this story, but Deputy Governor for Markets and Banking Dave Ramsden told a Feb. 6 press conference: “Gold is a physical asset, so there are real logistical constraints and security constraints. Getting into the Bank for me this morning was a bit trickier because there was a lorry in the bullion yard.”
“It takes time,” Ramsden added, “and the stuff is also quite heavy.”
Working Overtime
Caught in the crossfire of this transatlantic trade is a team of about 15 highly-vetted Bank of England staff. When a client makes a withdrawal request they undertake the physically demanding process of “digging out” the bars — each of which weigh 12.5 kilos — from the vaults spread out over two subterranean floors, according to people familiar with the matter. As a public institution the Bank of England can’t justify the cost of a larger permanent team to handle these infrequent spurts of activity — the last one was on the eve of the Covid-19 pandemic in 2020 — and security makes hiring temporary workers more difficult.
To deal with these situations, staff are usually paid overtime to clear the backlog as fast as possible. But a quirk of the system means that rather than having a right to any bar in the Bank of England, holders take ownership of specific bars. Staff must locate each one in turn, which can involve shifting and restacking several pallets of gold to get the exact one that’s needed, according to people with direct knowledge of the process and disclosures by the bank.
The Bank also has to spread the gold it holds more thinly than some other vaults, not for security reasons, but because of geology. The City of London is built on clay, and in order to prevent the building from sinking, the Bank — which moved to its home in Threadneedle Street in 1734 — stacks gold at no more than chest height.
When JPMorgan issued a job posting for a worker in its private vaults last year, it offered a rare glimpse into how physically and mentally demanding the business of hauling bars can be. Candidates needed to be able to lift 30-kilogram ingots easily and repeatedly, and be capable of moving 15 metric tons of bullion in a day. They’d also need first-class skills in communication and numeracy, a license to operate a fork-lift, and a strong eye for detail. Pay details for the unflappable, hyper-numerate and very strong winning candidate weren’t disclosed.
The Bank of England holds about 420,000 gold bars, and January saw the biggest outflow since 2012. Staff dug out about 8,145 bars — averaging 370 per working day — last month, but still a weeks-long backlog has developed. Once each load is ready, armored trucks operated by the likes of the Brink’s Co. receive the cargo in the bullion yard at the back of the bank, and shuttle it to airports on the outskirts of London.
The real-world frictions involved in pulling off the trade don’t end when the metal exits the Bank of England, or the other commercial vaults in the city run by JPMorgan, HSBC and others. At the airport the bars are loaded on to commercial flights in piles of up to five tons.
But rather than flying directly to New York they are first diverted to refineries in Switzerland, to be recast into smaller 1-kilogram ingots that can be delivered against futures contracts on the Comex exchange in New York. There, there’s another frenetic burst of activity as logistics companies race to get the bullion registered and stored in private vaults overseen by the exchange, according to a person familiar with the process.
It should be great business for the refineries — in addition to being busier with the rise in trades they make more money by casting smaller bars — but those profits have come under pressure from the surge in demand for spot metal which has increased the refiners’ financing costs sharply.
“The orders for kilo bars, not only at Argor, but overall in the industry, went up dramatically,” said Robin Kolvenbach, chief executive officer of Argor-Heraeus, a refiner of precious metals. He added that the company’s capacity for refining kilo bars “has been full in December, January, and is planned to be full in February and March as well.”
Gold Faces a Return Flight
The first sign that traders were factoring in the risk of Trump tariffs on metals — either individually or as part of a blanket package which the president had pledged on his path to the White House — materialized at the turn of the year when futures prices for gold, silver and copper started to rocket above other international price benchmarks. Yet, the White House has given no explicit indication that it will impose tariffs on gold, and many market watchers believe it will be spared. The tail risk, however, remains.
Dealers soon jumped on an opportunity to cash in on the spike in New York gold prices and the impact was immediate. On a slower timeframe, copper traders have also been rushing to ship metal into the US from all over the world and not just from leading producers in Chile and Peru.
But the window of opportunity to capture the arbitrage is already closing, say industry experts, which begs the question of what will happen to the abnormally large stockpile of gold sitting in Comex warehouses in the US?
When the incentive to bring gold to the US — traditionally a net exporter of the precious metal — disappears, said Nikos Kavalis, managing director at the consultancy Metals Focus, there’s likely to be a whiplash in the trade direction as the fresh kilo bars that have descended upon New York are sent back to markets overseas — be it to replenish stocks in London, or to meet physical demand in the Middle East or Asia.
“If consumption in Asia remains weak, then it’s high-fives all around for refineries because they’ll have to make them back into larger bars for London — which means more recasting charges,” Kavalis said. “If, at the same time, there is strong central bank demand, it could well be the case that some of that stuff gets converted into large bars and sent right back to the Bank of England.”
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