So they’re effectively naked on these trades?

How is it legal to “sell” something you don’t have? Bank to bank I get it - they understand the risk and can make that decision if they want - but to pass that risk onto an unwitting 3rd party who is expecting to receive gold and is now in a position where they believe they own it but instead have nothing but an unbacked and unfulfillable IOU seems unscrupulous if not outright illegal.

What happens when those IOU holders come to claim their gold and there’s none to give them?