The Journal. - Why Gold Bars Are Flying Over the Atlantic

Episode Date: February 26, 2025

If you landed on a flight from Europe to New York recently, you might have been an unwitting participant in a high-stakes, high-altitude gold trade. WSJ’s Joe Wallace explains what's going on with the gold market, and why gold bars have been flying commercial.  Further Reading: -Why Dealers Are Flying Gold Bars by Plane From London to New York  Further Listening: -Trump's Tariff Whiplash  -The Underground Battle for Colombia's Richest Gold Mine  Learn more about your ad choices. Visit megaphone.fm/adchoices

Recently, planes have been crossing the Atlantic Ocean with some pretty surprising cargo. The flights take off from Europe bound for New York. They carry the usual passengers, vacationers, business people, and the usual luggage. But along with all those identical black roller bags, they're carrying something else. Many, many tons of gold are flying over the Atlantic and the cargo hold of passenger planes. Gold bars? Bars, yeah, bars. Bars are gold.

That's my colleague, Joe Wallace. Would I ever know if gold was on my flight? No. They would never tell you. Then you'd be a target, right, for some armed robbery. That's true. Are there load balancing issues involved? Excellent question.

The limitation, I think, is financial. You can generally take up to five tons of gold, which is about half a billion dollars of gold, on a flight. And that's because the insurers won't insure anything above that. Well, that's a lot. It's a lot. Yeah, it's a lot of gold, which is about half a billion dollars of gold on a flight. And that's because the insurers won't insure anything above that. Well, that's a lot. It's a lot. Yeah, it's a lot of gold. You may have heard about the gold market. Maybe you even follow it a little bit.

But the details of how this market actually works, the actual mechanics of it, can get pretty complicated. It turns out the story of how gold ended up on planes involves vaults deep under the streets of London, Swiss gold refiners, New York gold traders, and one U.S. president. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, February 26th. Coming up on the show, why billions of dollars worth of gold is flying commercial over the Atlantic. whether you own a bustling hair salon or a hot new bakery you need business

insurance that can keep up with your evolving needs with flexible coverage options from TV insurance you only pay for what you need. TD. Ready for you. The fact that so much gold is being hauled in passenger planes is a symptom that something is off in the gold market. But to understand what's wrong, you have to understand how this market usually works. Who buys gold? Who buys gold? Who buys gold? So, you know, some of the biggest buyers in the past few years have been central banks.

They buy gold, for example, in case they need to defend their local currencies. And if you have a big stockpile of gold, you can sell gold to buy your currency and support the currency. Then there's commercial companies like jewelry companies. Tiffany will buy gold to make rings and earrings and necklaces, etc. And very, very wealthy people might own gold bars. There are a lot of goldbugs out there who buy gold as a kind of doomsday asset in case of inflation, rockets, or there's a war, or some other pestilence or plague.

And then there are the banks. In particular, JP Morgan and HSBC. You know, some of the world's biggest financial institutions have huge gold businesses buying and selling gold or investing in gold companies and miners. They kind of sit at the center of the market and knit the whole thing together. So they might buy gold from a mine,

sell it to a refiner in Switzerland, then sell it on to a client who wants to buy gold. They're kind of at the center of the market. The gold market is anchored by two cities. One is London. That's dating back to when Isaac Newton was head of the UK Mint. Wow, okay. London has been the physical gold market has revolved around London and specifically vaults

far beneath the streets. So if you want to buy like a physical gold bar, you go to London for that? Yeah, that would be your first port of call. The gold market's second hub is New York. Since the 70s, there's been a very, very active financial market in gold, you know, financial contracts, derivative contracts in New York. And the banks that play such an important role in the gold market, they're constantly trading between the two locations, London and New York.

The gold traders at these banks, they're our main characters in this gold on a plane story. They're sitting on billions of dollars worth of gold bars stored in vaults in London. And Joe says, owning all that gold can be kind of risky. If you're JP Morgan and you own, I don't know, a billion dollars of gold in London, gold isn't, it's not like a stock.

You don't get a dividend, it's not a bond, you don't receive a coupon, it's some metal. It doesn't, you only gain money if the price rises, but you don't want to sit there with a massive billion, five billion, 10 billion dollar exposure hoping the price of gold goes up. It may never go up. And in fact, the price might go down and that's a big risk. If the price goes down, then you've lost a load of money. So, handily, there's a way to offset that risk, which is by selling futures in New York and that's called hedging. You're hedging your bets.

Here's how it works. Say I'm a gold trader at a bank sitting on a billion dollars worth of gold in London. That gold is worth, say, twenty five hundred bucks a troy ounce. That's the standard measured for gold, by the way, a troy ounce. But I'm worried that the price of gold

is going to fall. I want to lock in that twenty five hundred dollar price. So I head over to New York and I sell gold futures. Basically, a promise to sell gold at a certain price at a certain time. In this case, I sell futures contracts promising to sell gold at $2,500 an ounce at some later date. I lock in that price. If you own gold bars in London and you've sold gold futures contracts in New York, you have two

kind of mirror image trades. If the price of gold falls by 50%, you lose 50% on your position in London. So on paper, my billion dollars worth of gold is worth just half a billion. But you gain 50% on your position in New York because you sold at $2,500, the futures contract, and after that the price of gold in the open market falls to $1,250. Your agreement to sell gold at $2,500 is suddenly incredibly valuable because that's worth, that's twice the value of gold in the market now. So in theory you should be level, whatever happens in the market now. So in theory, you should be level, whatever happens in the market.

Okay, so it's kind of like a seesaw. Like if I, if gold prices are down in London, but I was able to sell futures in New York, that means I'm up in New York. Exactly. Yeah, and vice versa. Yeah, precisely. And this almost always works? And this almost always works? Pretty much, yeah. Assuming the London and the New York markets move pretty much in lockstep, which they mostly do via protected. This is a very important caveat. For this seesaw trade to work,

gold prices in London and New York need to be pretty much the same. They need to move together. When they don't, the seesaw snaps. And that's what happened late last year. It's all to do with President Trump. The word tariff, properly used, is a beautiful word. One of the most beautiful words I've ever heard. It's music to my ears. Before the election, Trump mooted the possibility of putting a universal tariff on everything that the U.S. imports of 20 percent.

And around the time of the election, people thought, hang on, what if that tariff is applied to gold? Gold traders began to worry. And they began pricing in that worry. On the assumption that gold in the U.S. was about to become a lot more expensive, they started charging more for it. The price of US gold began to climb. How much more expensive is gold in New York versus London right now? Today, it's so volatile, it's hard to keep track. But over the past few months, it's averaged about $20 more in New York than in London. It reached a high of about $50 or $60. Normally, that's like $2 or $3, so it's way, way higher than normal. And that's baking in a possible tariff at the U.S. border on gold.

This was bad news for the gold traders at big banks who'd been relying on that seesaw trade. The price of gold in New York was climbing, which meant that their contracts to sell gold at the earlier, cheaper price were losing money. They were down in New York. But they weren't up enough in London to balance it all out because the price of gold wasn't rising as much in London. Suddenly, they were losing a lot of money on their New York positions and they weren't gaining as much on their London positions.

So if you're in that position, if you're a gold trader at a bank, you might get a knock on the door from your risk committee saying, hang on, on paper you're losing a lot of money here, what can we do about this? To do nothing and just eat the loss was potentially disastrous. How much money is at stake here? Like how much money could the banks lose? They're very secretive about what they never want to admit to the size of the positions How much money is at stake here? Like, how much money could the banks lose?

They're very secretive about what they never want to admit to the size of the positions or what they're possibly losing. But you hear, you know, in the market you hear about hundreds of millions of dollars, possibly. That's the worst case scenario. It's much cheaper to get out of the loss-making trade by sticking gold on the plane, getting it over to New York, and handing it to the person who owns the futures contract. Planes. That was the solution. Remember, the traders at the big banks had gold, cheaper gold, sitting in their vaults in London. Traders could use that cheaper gold to pay off their contract holders in New York, where gold was expensive.

They could still fix this. All they had to do was get their gold across the Atlantic. But that would be easier said than done. That's after the break. The gold traders had their plan. Fly gold from London to New York and avoid big losses. But there would be many hurdles along the way, starting with just getting their gold out of the vaults in the first place. There are plenty of private vaults in London, but by far the biggest stash of gold is at the Bank of England.

The Bank of England. It's a gigantic stone edifice at the center of London's historic financial district. Underneath it lie nine vaults containing about 400,000 gold bars. Most of that is owned by overseas central banks but also by commercial banks. Yeah it's giving like Gringotts from Harry Potter. Well there's your money Harry. Gringotts, the wizard bank.

And picturing underground vaults like trains, goblins. Exactly although right now think of a couple of overworked harried forklift drivers rather than goblins. Bank of England employees have been stressed lately because for months, gold traders have been lining up trying to get their gold out of their vaults to fly up to New York. A huge long queue developed to get gold out, and by all accounts, the people manning the vaults were struggling to meet demand, and that's partly for a slightly quirky reason. If you own gold at the Bank of England, you have a claim on a specific bar.

So the same bar that you put in has to come out. And that means that the people who run the vaults have to go in and find your specific bar on. Does it have your name stamped on it? Or a serial number? I don't actually know how they identify it. Joe's gold. Exactly.

The queue to get gold out of the central bank got long. Like eight weeks long. Which was a problem because these traders had a deadline. Futures contracts run month to month. So traders just had a few weeks to get their gold out of London and into the hands of contract holders in New York. According to Joe's reporting, anxious traders were calling up Bank of England officials to try to move things along. The bank told them they had to wait their turn.

So if you needed that gold to get out of your trade, you're toast and you have to eat the loss. Some lucky traders did manage to get their gold out, only to face a new problem. The gold bars were the wrong size. They couldn't be traded in New York. The New York exchange, it accepts a different size of bar to the bars which trade in London. So naturally. So exactly.

This isn't the system you would design on paper if you were inventing the market today? But you have to resize them. So the refinery will, three main refineries, and they'll melt the bars down and just recast them into the right size of bar that you can send over into New York. Those refineries, though, aren't in London. They aren't even in England. Most of them are in Switzerland, which meant some traders had to arrange side trips for their gold bars before they could finally be sent to New York. What's involved in flying

it to New York? You'll hire one of the few security companies that specialize in moving very high-value goods, and they take gold in kind of secure vans over to the airport, and then it goes into the hold of a commercial plane. And then on the other side in New York, the same thing happens. It goes in a van across town into a vault. For all the trouble involved in trying to get gold across the Atlantic, for those who could pull it off,

it was worth it. We don't know who, you know, there are all sorts of rumors in the market about who might have lost money. And, but given the amount of gold that has flown over over the past few months, you have to assume that a lot of banks were pretty successful about getting out of those loss-making trades. Not only that, Joe says some people are making money. Soon after almost losing their shirts, some traders have embraced a new strategy,

one that takes advantage of gold's price difference in London and New York. Once you've got out of those loss-making trades, you then have a great chance to make a load of money because suddenly gold is much cheaper in London than New York. So you put on a new trade, you buy more gold in London, and you lock in a much higher price in New York. And provided you know, if you know you can get the gold over, it's almost free money. So it's like the old buy low, sell high. You buy gold for cheap in London, you fly it over to New York, and then you sell it

high. Exactly. It's a classic arbitrage. There's a higher price in one market than another, and you make good money. All of which means those transatlantic gold flights probably won't be stopping anytime soon. That's all for today, Wednesday, February 26th. The Journal is a co-production of Spotify

and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.