The gold price may be up over 20% so far this year, but the London gold market could be facing its biggest problem since the failure of the London gold pool in 1968.

This is the claim by London strategist, Paul Mylchreest, who believes the amount of physical gold left is approaching zero. According to Mychreest increased demand from form China and Exchange Traded Funds (ETF’s) is causing the vaults to run dry.

The London gold market is the largest in the world and the center for unallocated gold trading. If there is no physical left there is nothing to support the daily $200 billion worth of paper trades.

Unallocated trading accounts for 95% of all trading and is based on a fractional reserve system. The system will only work if traders continue to have confidence in the bank’s ability to make delivery if demanded. If confidence is lost we could see a two tier gold market with a physical gold contract trading at a premium to an unallocated one.

If you exclude ETF’s and gold stored with the Bank of England there is only 300 tonnes of gold left in the entire London gold system. It would only take a large sovereign wealth fund to request physical delivery to drain the vaults and bring down the whole unallocated gold market.