Correct. The gold is rehypothecated - gold is used as collateral for additional debts many times over. The gold is initially leased by the LBMA and many more contracts on that gold is issued and sold on the futures market.

Typically gold is not supposed to leave the vaults, and the banks would settle with paper at the close of the contract. Banks need to pay attention to open interest (which is the total amount of outstanding derivative contracts). If it's too high, they need to shake the tree and prevent a mass of contracts from taking delivery.