The whole gold supply chain is moving east, and it has been for 10 years. The order is clear: first demand goes east, then the vaults, then the refiners who start new refineries there, then the businesses, salesmen, and storefronts, and finally pricing itself moves east. Gold has already replaced the dollar as the largest reserve asset on many central banks' balance sheets.
Hong Kong as China's Testing Ground
China is placing its gold in Hong Kong. Hong Kong is its own state with its own mayor, but in practice it is a ward of China. China runs on five-year plans, and Hong Kong just announced its first one, so the two are merging culturally. The Hong Kong Exchange plans to raise its bullion storage to about 2,000 tons, a massive jump from current levels. Hong Kong is now a hot city for bullion: vaults are opening, refineries want in, and PAMP is considering opening a refinery there.
Once the supply chain settles in Hong Kong, China plans to tie its currency to the gold market. This does not mean backing the yuan with gold. It means making it fully convertible. That is the core problem China faces. It has an onshore currency locked by capital controls, which makes it a "hot house flower" that can only survive under those controls. China can build the infrastructure to challenge dollar dominance without freeing its currency, but the yuan stays constrained and hard to trust worldwide.
There is an offshore yuan, but its liquidity is very limited, run like a controlled experiment. China is now expanding that experiment. The plan works through the "plumbing": to open the currency, you open it only in Hong Kong. They are turning Hong Kong into what Shanghai is for gold, a commercial zone where you can trade tax-free. Hong Kong now has no capital gains taxes for employees, so a bonus is not taxed as capital gains. Hong Kong is changing its whole culture to fit what is coming from China. China knows its cloistered currency makes global trust hard, and it is slowly coming out of the box by tying the yuan to gold in Hong Kong. Gold is the neutral trust layer China uses as it builds an alternative financial system. A rival system does not need to overthrow the dollar overnight; it just makes dependence on Western infrastructure gradually less necessary.
The LME Tokenization Story
A headline this week: the London Metal Exchange (LME) is looking at turning physical metal held in its Hong Kong warehouses into digital tokens that could be used for financing, putting them on the blockchain as real world assets. The LME has been owned by Hong Kong Exchanges and Clearing (HKEX) since 2012.
This sits at the intersection of stablecoins, tokenization, and precious metals. The LME is a base metals exchange, not a precious metals one. So why would an investor want tokenized aluminum, copper, iron ore, or nickel? Most of us would not care. The people who care are the owners.
The news: the LME holds tons of metal that sit off exchange, and it wants to bring that metal into the pool without physically moving it. So it will tokenize it. The token works like a warrant for the physical metal, and the warrants trade on the exchange.
Here is why this matters for all metal prices, precious ones included. When you tokenize an asset, you make it so it cannot be rehypothecated without the ultimate owner's permission. Tokenization is like a title search on a house, where you check for liens before buying. If 5 tons of copper is tokenized, you can instantly see whether there is a lien on it, whether it has been rehypothecated, and whether it is truly unencumbered, with no big search needed. A warehouse may say it holds 100 tons of copper, but tokenization makes it easy to mark how much is actually available versus not.
This is bullish because of rehypothecation. Silver is chronically rehypothecated. If you hold one ounce of silver with a bullion bank, the bank can sell that same ounce ahead three or four times, and you have no control. If you ask for your silver back, they hand it over, but your literal ounce has been sold three or four times out there. With a token attached, it is like the silver sits in your possession. You can say: hold my silver, but you cannot resell it. That shrinks the pool of metal available for rehypothecation. A smaller pool pushes the price up. The optionality accrues to the owners, so prices rise. This is down the road, not tomorrow. A 20,000-word paper was written on this with Eric Young.
West to East, and Better Price Discovery
When you read "LME partners with Hong Kong exchange," your first reaction might be that the West and East are teaming up and price suppression will continue. That was the natural reaction, and it would have been right in the past. They will be working together one way or another. But HKEX owns the LME, and the LME failed badly when its nickel contract blew up, so HKEX has a tight grip. The LME still sits under London regulatory coverage, but it is run and operated by HKEX.
Supply chains for gold and silver have been moving east since at least 2016, when JPMorgan (JPM) and Deutsche Bank (DB) opened silver and gold vaults in Singapore. As the physical center of gravity moves west to east, with an emphasis on physical delivery, price discovery should improve. Tokenization accelerates that. Better transparency can exist alongside concentrated ownership and regulatory control, but the real test is whether deliverability improves and hidden claims drop.
Silver is the goldilocks of metals. It will sit between base, industrial, and precious, so both sides want it, and tokenization will eventually drive silver much higher. The LME-HKEX joint venture is really a door for all the metals to be sucked out of London and sent into Asia.
The Bull Case and Its Risks
Despite recent downward moves in price, the outlook for gold and silver is very bullish. The biggest risk that gold investors underestimate is simple: the world starting to get along again. I do not believe that will happen. We are in a cold war 2.0, a quiet World War. There is war in the Middle East, war in Ukraine, and unrest in Latin America. The world is fragmenting and decentralizing. Pax Americana is dead, and something will replace it; immigration is part of that somehow.
Even if these conflicts magically undid themselves, if the US told Russia all is forgiven and returned its money, that still would not guarantee trust, so gold would not be as important. But what would replace gold? Nothing, and central banks will not sell the gold they just bought. So the one and only thing I watch for is signs the world is getting along again.
Think of the world as kids at recess who all brought their balls to the playground and played together. When recess ends and school lets out, they each take their ball home, because they are not friends anymore. That is the gold story: nations repatriating their gold. The only thing in gold's way is a kumbaya moment where everyone gets along.
Silver is a little different, with two risks. First, the same one: if the world gets along, the need to stockpile silver and rebuild your own supply chain fades, so silver gets shared more gradually. Second, if silver climbs back to $120, thrifting takes over again and industry hunts for a synthetic substitute. I do not see that substitution happening, but that is the process these things go through. Those are the only two things that undermine my bullishness. Investors should separate monetary demand from industrial consumption rather than assume every source of demand keeps growing.
Fiscal Responsibility Is Unlikely
Some guests argue that if politicians suddenly turned fiscally responsible, that could hurt the gold case. I do not think that will happen either. The chance of Europe or the US becoming fiscally responsible is very low. In Europe, with so many immigrants, you cannot cut the social safety net and you cannot cut defense spending. The world is renegotiating right now, Europe and the US included. Europe holds a small slice of the world's population but a huge share of the world's welfare state, while the US holds a small slice of population but a huge share of the world's military. Governments can promise fiscal discipline, but aging obligations, social programs, and defense commitments all compete for budgets voters do not want cut. Persistent deficits matter to investors because borrowing needs push on bond yields, currencies, and confidence in public finances.
