Understanding The Threat to Commodity Derivatives, According to Alasdair Macleod
The comments below are an edited and abridged synopsis of an article by Alasdair Macleod via Von Greyerz Gold
The threat to commodity derivatives is more than a technical critique—it may signal deep structural stress in financial markets. Economist Alasdair Macleod argues that the very design of commodity and gold derivatives is flawed, and that the system built around them faces growing risk and potential breakdown.
Macleod begins by reminding us that, in most common law systems, gold is money and fiat currencies are inferior credit. When derivatives are used to speculate or hedge in markets for things that function as money, the result is inherently unstable. He explains that past policies intentionally expanded derivative markets to divert demand away from physical gold.
According to Macleod, after the end of the Bretton Woods gold standard in 1971, Western authorities prioritized fiat currency dominance. They did this by reforming financial systems, adjusting economic statistics to control inflation narratives, and encouraging the growth of paper derivative markets. These strategies helped suppress the gold price and maintain demand for currencies like the US dollar.
Over time, the scale of commodity derivatives grew far beyond the physical markets they were supposed to represent. In London bullion markets, for example, tens of millions of ounces were cleared daily in the late 1990s. Today, although trading values are higher, fewer ounces are being cleared, suggesting a mismatch between paper claims and actual metal available.
Macleod also highlights issues on the COMEX side of the market. Bullion bank traders hold significant gross and net short positions, far larger than in past decades. When physical gold is drained to satisfy delivery demands from central banks and Asian buyers, the paper markets face increasing strain to balance liabilities with tangible assets.
This imbalance matters because paper markets must continually attract new capital to sustain leveraged positions. Higher prices demand more fiat currency backing. That dynamic becomes harder to maintain when confidence in fiat currencies weakens, and demand for physical assets rises.
As Macleod sees it, the threat to commodity derivatives lies in their dwindling credibility and mounting structural pressure. Commodity prices expressed in dollars have risen dramatically over time, driven by inflation and monetary expansion. Yet when priced in gold, many commodities have remained comparatively stable. This suggests that fiat currency weakness, not inherent commodity scarcity, is driving price inflation.
Ultimately, Macleod argues that as derivative markets come under stress, physical replacement demand could surge. When traders and institutions realize paper claims are unsustainable, they may shift toward real assets. This shift could cause losses for financial institutions deeply exposed to derivative liabilities.
The broader implication of the threat to commodity derivatives is that markets reliant on ever-expanding paper instruments risk a crisis if the underpinning fiat system falters. Macleod’s view challenges investors to reconsider how they assess risk—not just in gold markets, but in the wider commodity complex supported by derivatives.
