Reading the gold market: London, Comex, paper versus physical

Gold is the oldest monetary asset and one of the most misread. It is treated as a commodity, a currency, a relic or a hedge, depending on the story of the day. It is all of those, but not in the same way. This guide explains where gold’s price is formed, how paper and physical markets connect, what really drives the price, and why central banks have become decisive buyers. The 2026 cycle, a record followed by a brutal correction, is the case study.

A monetary asset, not a normal commodity

Gold is mined, refined and stored, but it differs from ordinary commodities in the most important respect: it is barely consumed. Most of the gold ever mined, around 210,000 tonnes, still exists in jewellery, bars, coins or reserves.

Its price is therefore not mainly a production-consumption balance like oil. It is the price of desired stock. Gold is an asset of hoarding, not an industrial flow.

Its second feature is that it yields nothing. No coupon, no dividend. Holding gold has an opportunity cost: the return you give up by not holding bonds. That is why gold was long read as the inverse of real rates. When real rates rise, gold should fall. That model worked for decades, then weakened after 2022, when gold rose despite high real rates. Another driver had taken over.

Where price is formed: London and Comex

Gold price formation is split between two major markets.

The first is London, the over-the-counter market coordinated by the LBMA. Banks, refiners, miners and central banks trade physical “loco London” gold deliverable in London vaults. This is the anchor of the physical market, with daily turnover around $180 billion. Twice a day, at 10:30 and 15:00 London time, an electronic auction administered by ICE sets the LBMA Gold Price, a global benchmark used to value reserves, ETFs and contracts.

The second is the Comex in New York, a futures market where promises of metal trade with leverage. Comex does not anchor the physical market; it amplifies expectations and positioning. Shanghai now matters too, as Asian demand and pricing power rise.

London anchors physical metal. Comex sets the tempo. Shanghai’s weight is rising.

Paper versus physical

The link between Comex futures and London physical is the key plumbing. Moving from a Comex futures position to physical gold in London uses an exchange-for-physical transaction, or EFP. The spread normally stays narrow. When demand for deliverable metal rises sharply, the EFP can widen, signalling stress between paper promises and physical availability.

The gold lease rate is another pressure gauge. Physical gold can be lent out. When metal becomes scarce, lease rates rise, which can pull futures below spot and drain deliverable liquidity. Watching EFP spreads and lease rates tells you where the stress is: in the displayed price or in the physical metal behind it.

What really drives gold

Four forces drive gold, and their hierarchy changes.

Real rates remain the classic opportunity-cost variable. The dollar also matters: a weaker dollar makes dollar-priced gold cheaper for the rest of the world, a mechanism covered in the dollar guide. Safe-haven demand appears during geopolitical shocks.

But since 2022, the dominant driver has been debasement risk: distrust of paper currencies amid exploding public debt, sanctions risk and reserve diversification. That is why gold rose even when real rates were high. If gold rises without real rates or the dollar explaining it, look for official-sector demand and debasement fear.

Central banks: the marginal buyer

Since 2022, central banks have become the marginal force. Their purchases roughly doubled compared with the previous decade, averaging about 225 tonnes per quarter from 2021 to 2025. The logic is simple: diversify reserves away from the dollar and hold an asset that cannot be frozen by a foreign sovereign.

That engine slowed in early 2026. Declared net purchases fell to only 16 tonnes in the first quarter, with some central banks selling, including a large Turkish sale in March. But not all official purchases are reported to the IMF, so real demand can be partly hidden. Reading central-bank gold demand requires crossing declared reserve data with import and physical-flow estimates.

Gold as the second reserve asset

Official gold holdings have reached nearly 39,000 tonnes, worth about $5 trillion, making gold the second-largest reserve asset behind the dollar and ahead of the euro. This is one visible face of dedollarisation: not an abandonment of the dollar, but gradual diversification toward a neutral asset.

The move must be measured carefully. Gold’s reserve share rises both because central banks buy tonnes and because the price of gold rises. Volume effect and valuation effect are different.

2026: record, then correction

The 2026 cycle shows the volatility of a sentiment-driven, non-yielding asset. After a near-vertical rise, gold touched a record close to $5,600 per ounce in January 2026 before correcting toward $4,150 by early July. That is a drop of more than 25% from the peak.

The correction coincided with slower reported central-bank buying and a dollar that remained central as a funding currency. The debasement story did not vanish, but the official-demand engine paused, and price reflected it.

Reading gold in practice

Gold is not a relic; it is a monetary barometer. London versus Comex tells you where price and physical stress are formed. EFP spreads and lease rates reveal paper-physical tension. Real rates, the dollar, safe-haven flows and debasement risk explain the movement. Central-bank demand tells you whether the marginal buyer is still there.

Gold predicts nothing. It measures how much confidence the world gives, or withdraws from, paper money.

This guide complements the oil market guide for commodity-market method and the dollar guide for the monetary background.

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Main sources: World Gold Council, Gold Market Primer: Market Size and Structure; World Gold Council, Gold Demand Trends; LBMA Precious Metals Market Report; LBMA OTC guide on futures markets and exchange-traded products; TradingEconomics gold price data for the 2026 peak and correction.