➡ Gold trading is shifting from the U.S. to places like Dubai and Shanghai, with the U.S. losing its dominance in the market. This shift, which has been happening since 2013, is likely permanent and could weaken the U.S. dollar. The change is not just about gold, but also about the global monetary system. This is evident in the falling volumes and interest in the U.S. gold market, which suggests that traders are leaving rather than new ones joining.

Step back again. Where are we? Welcome to the Morning Markets and Metals with Vince Lancey. Where each morning Vince brings you the financial and precious metals news to get you ready for your day. And now, here’s Vince. Hi. I believe the recent decline in open interest, especially over the last few weeks, has shifted meaning. What began as a sign of a healthy market has become something else. Not necessarily unhealthy in the long run, but now a signal. Risk is rising. Specifically, risk to the viability of the COMEX gold contract and a slow-moving, but now quickening, effort to unwind short positions in the U.S.

What does it mean for price? If that’s why you’re here, well, it means, over the next year or so, 20%, the next 20% could be lower, but the next 50% or 100% will be higher. Usual disclaimers added. But drilling down a little bit more, picture a Venn diagram with four circles. One circle is Basel III implementation, day of July 1st, another trumps tariff negotiations and the economic standoff with China. The third, the upward bias we’re seeing from swap dealers in COMEX trading, covering shorts faster than usual, while longs are exiting positions, often for profit and also faster than usual.

And the fourth circle, let’s call that a placeholder. Actually, no, it’s not a placeholder. The fourth circle is gold repatriation. The U.S. is actively pulling back a significant chunk of its gold. Now, these circles intersect, not just symbolically, but operationally. And we’re going to have to narrow down and eventually define what sits at the center of that intersection. For now, here’s what it contains, kind of a bucket. July 1st, Basel III gets implemented. July 6th through 8th, the BRICS summit, and whatever internal deadline the Trump administration has set for escalation in the ongoing U.S.-China trade war.

What else belongs in the middle? Well, that’s where it gets, I think, really important. The death of financialization, the repatriation of payment chains, the deconstruction of the rehypothecation-based carry trade that’s underpinned global markets for decades. Obviously, I’m talking about gold. So what would this graphic actually mean? Well, let’s get to that. But first, let’s go back to the open interest, because that’s what sparked this whole connection of dots and this Venn diagram exercise. Section two, market structure. What’s normal versus what’s changing? Let’s talk about the plumbing, how markets function underneath.

That’s where we need to begin, not necessarily because it’s the foundation of everything, but because it’s critical to understanding what we’re seeing right now. And it’s what triggered this whole conversation. There are two areas to cover what healthy and unhealthy markets look like structurally, particularly in futures, and what Basel III actually implies to the market structures, broadly speaking, and how it’s likely to manifest in the U.S., presumably starting July 1st, rolled out over three years. From there, we’ll talk about how these two concepts, market structure and Basel III, interact to change what we consider normal market behavior.

And there’s a causative relationship in play. So let’s begin, at least for now, with how I look at things. We’re going to start with a normal, with what a normal functioning market looks like. Now, this will get a little granular here. If you already understand how futures markets function, you can skip ahead. But some people may need to hear this. And it’s actually the missing piece that the founders group and myself have been discussing for the last two years, evolutionarily speaking. And we may have crossed a Rubicon of sorts in the past week or so.

Okay. It served essentially what just happened to tie together and make definitive opinions, my own, of course, come about. Okay, so here we go. In a normal futures market, price direction is accompanied by pattern-based changes in open interest. But what we’re seeing now is very different. COMEX open interest has been declining consistently with almost no bounce to levels we haven’t seen in years, while the price of gold continues to rally. That trend has accelerated over the last month, and it’s accelerating again over the last week. So what does that mean? In a healthy market, when open interest drops as price rises, that’s typically just short-covering.

Shorts are nervous, and you get what’s technically known as a short-covering rally. Happens all the time, just like long-stake profits, and the market drops, shorts cover, and the market rises. So yes, that’s normal behavior. But when it persists and becomes extreme, it starts to raise new questions. Before we go there, we need to take a step back and look at COMEX structure in particular, who the players are. Historically, bank swap desk shorts have dominated this market. The bullion banks, they have the deepest pockets, the most information flow, and asymmetric control of the market structure itself.

They also have physical gold, which drives, which gives them, I should say, the ability to short anywhere from 5 to 20 times what they physically hold, because no one ever actually takes delivery. And that’s worked for decades. But occasionally, even they get nervous. They’ll proactively cover, not out of panic, but out of prudence. You often see that before major events. October 7th, last year, for example, right before the Israeli conflict escalated, or started, I should say, they got tapped on the shoulder. Same thing happened before both Iraqi wars. The banks, the market making shorts, covered not because they were sure they’d lose money, but because they weren’t sure they wouldn’t lose money.

I had traders tell me on multiple occasions, literally, if nothing happens, I’ll just kick them back out on Monday. Over the years, that’s how it worked. So to sum this plumbing part up, in a normal market, when shorts cover into a rally, open interest drops. If it lasts, that’s very rare. And it often reflects bank de-risking, positioning ahead of uncertainty. But now, it’s different, or at least chronic and exaggerated. This time, open interest isn’t just falling. It’s falling to relatively extreme levels. And while open interest changes alone are conclusive, in the broader context, in combination with the things we’ve been studying for the last three years, China stepping up as a gold futures and physical market hub, accelerating recently, Basel III implementation happening in three months, the structural death of the rehypothecation trade, a function of that, and US-China economic realignment, or misalignment, if you want to call it that.

This open interest collapse is not just healthy short covering. It’s potentially something much bigger. Section three, two interpretations, regime change or contract death. So let’s lay out what we think are the two possible interpretations of this dramatic shift in open interest. It’s possible both are true at the same time. Scenario one, this is still a healthy market, but it’s entering a new regime, a good regime. The banks may have realized this is now a buyer’s market. You have to be long. You can’t play the old game anymore. You can’t lean on leverage. You can’t assume architecture.

The market structure has changed. So they’re resetting their books every chance they get. They’re not panicking. Maybe they are. Maybe some of them are panicking, but they’re definitely repositioning. They see what’s coming. They know Basel III is the real deal. They know the gold trade is transitioning to a physical first system. They know China is now center stage in futures and physical. So they adapt. That’s what smart money does. This scenario still qualifies as healthy, but it feels extreme because it’s a break from everything we’ve known. That’s our own historical bias.

It’s what you’d call regime change in the structure of the market. And to be clear, regime changes do happen. They’ve happened in other asset classes over the years, but not in gold, not in my entire career. My career spans to 1994. Open interest collapse makes things understandable, but open interest collapse while price continues to rise can also signal a much darker outcome. Now the contract in scenario two is the contract is dying. That’s the darker outcome, not just repositioning, not just short covering, but complete disengagement from the market. It could be that the COMEX contract in gold itself is dying.

We’ve seen this before. Palladium as a prime example. That market was squeezed by the banks. Funds got blown out repeatedly. Eventually it became unusable. Still it exists. Yes. But as a shell of its former self, no one touches it now. It’s too thin. It’s too dangerous. The same thing happened with the potato contract on Nymax. I’m going way back to stories I heard. It got taken out, effectively destroyed by interlopers. In this case, the gold case, the interloper may not be a fund or rogue trader. In fact, it’s not. The interloper is China. They’re not trying to destroy COMEX.

It’s destroying itself from the inside. They’re just buying physical. And that’s collapsing the entire rehypothecation based leverage system underpinning the COMEX structure. So before we go further, let me ask it again. Is the COMEX contract dying? Empirically, on observable fronts, it’s already fading in relevance. Not necessarily dying, but giving up dominance, for sure, to China and Dubai. And anyone else who opens up a gold contract. Section four, evidence of decline, volume migration and market dislocation. Let’s look at the evidence. First, market share. COMEX’s share of global gold futures, volume, open interest, I should say, and volume is declining.

Look at Dubai. Look at Shanghai. Volumes are growing there and shrinking here. They are shrinking here in terms of market share with them. And I’m putting a note here to include some picks to give a feel for this. Open interest is actually the more important aspect here. Open interest in those foreign exchanges is rising. Here in the U.S., it’s falling. That’s not a blip. That’s a relocation. Demand, business, vaults, pricing all follow. Supply chain exodus for the past 15 years. It’s been going on since 2013 visibly, but not obviously. This is all the culmination in price now following, right? Price is the last part of supply chain.

Market interest, that’s what open interest is, is moving geographically, structurally, and probably permanently. The neighborhood is changing for gold, and COMEX is not the center anymore. This is something I discussed years ago with Tom Livongo and learned years prior from a relationship with Diego Perfumo, who was an expert on market structure at the exchange level. Tom and I looked at the premise that if China takes the lead in physical gold and Basel III eliminates Western leverage, then China benefits, and the U.S. does not. That means COMEX, the old home of dollar-based pricing, starts to die.

Meanwhile, Shanghai, physical and futures exchanges thrive. At the time, we framed it as a proxy for dollar death. If you dominate global pricing, the dollar remains strong. If you lose pricing power to another region, a dollar loses one of its key structural supports. A leg gets kicked out underneath it. Global pricing becomes regional pricing for gold. That’s not a gold issue. That’s a monetary regime issue, and it’s dangerous for the dollar. So again, stepping back again, where are we? COMEX open volumes are falling. Opening volumes, I should say. Bar and opening volumes are rising.

Open interest here is shrinking. Overseas growing. And here’s the kicker. Rising volume on the COMEX doesn’t necessarily mean new players are entering. It often means existing players exiting, squeezed out, losing relevance, liquidating, searching for liquidity. So when you see volume spike and open interest fall, you’re seeing a market in liquidation, and that’s what COMEX Gold looks like right now today. Thanks for watching!
[tr:trw].

See more of Arcadia Economics on their Public Channel and the MPN Arcadia Economics channel.