Yes that's exactly the point. The idea of futures was always misused, sometimes even against the law (as is in this case). Selling a product which you don't have and do not have any contracts to obtain in the stipulated time is what's known as Naked Short Selling.

A "decent" future would be if the bank can prove that they will have the actual gold for delivery at the stipulated date. The proof that they don't (and won't) is that they offered paying more back and then (when the buyer refused) asking the reserve bank to help out. If they knew they'd have the gold at the future date, they could simply have stated: "No ... as per the future agreement you have to wait until the date expires." This they didn't do!

As for the demand ... I'm not sure what you mean. Clearly the "demand" is already there since the buyer has bought the future and asked for the physical gold. It's the supply which is not there, the bank does not have the gold and apparently can't get hold of it either. But still they sold it!

I'd actually like to see a comparison between the amount of gold traded through futures and the tonnage mined to date. Hopefully there's not a glaring discrepancy, but I'll not be surprised.