It was the German dramatist Gotthold Lessing who observed: “In nature everything is connected, everything is interwoven, everything changes with everything, everything merges from one into another.” Never has that been truer especially as a means for explaining today's gold market.
The US is the global home for gold futures trading and these leveraged contracts are usually simply rolled or cash settled but, importantly, with the option to take physical delivery … which is rarely taken up. However, with the possibility that gold and silver imports might incur a significant additional cost, New York dealers are asking for physical delivery.
Underlying this is the fear that the US would impose tariffs on a range of imports (including precious metals) which has stoked up a frenzy to hold the physical. True or not, financial markets love it when someone is potentially trapped in a corner as this is the surest way to make virtually risk free profits … the reality, well we'll deal with that later.
London meanwhile remains the global centre for spot and physical trades. It makes the rules, it warehouses the metal for the world and it runs the global price discovery process which is still defined as 'loco London'.
Well gold has been flowing wholesale out of UK vaults and into US ones driven by the differential in the price between the two locations – it's an arbitrage trade. From a fundamental perspective it's no change – just metal held at one location now being held at another. It is not being 'consumed' as such. Problem is, it takes about 9 days to complete each movement and the demand has put a large strain on delivery systems.
London is also the centre for gold leases – the borrowing and lending of precious metals, with bullion banks typically borrowing from central banks or other market participants and lending to quality institutions that borrow gold thus earning a spread. Borrowers include jewellery manufacturing groups, miners and ...those who are shorting the market (they borrow gold to sell it in the expectation that prices will fall, where they make a profit). But if the cost of borrowing gold goes through the roof … as it has ... then that trade can get deeply unattractive and expensive very quickly.
Inter-bank gold lease rates are typically sub 0.5% while market counterparts could pay between 1% to 3% pa depending upon credit worthiness. Well interbank borrowing costs for 1 to 3 months perioods recently rose to a peak of about 12%. That hurts.
So that's what we have today … and that takes us back to New York. Speculators who have been running a leveraged short gold position are closing out these bets by buying gold because it is expensive to run (and likely taking a loss) … and hence the price rally. Everything is connected.
We estimate that so far 280 tonnes of gold has been flown from London to New York in the last month – so between 50 to 60 flights will have been carrying the metal into CME registered vaults to fill the demand. If no tariffs, then likely that metal will come home to London over the next few months.
The perhaps 'over-response' to this log jam is unstandable when you consider we have been here before. During COVID there were issues around deliveries into New York as market infrastructure effectively closed down and banks were forced to take mark-to-market losses onto their books. The difficulty is still fresh in risk managers minds and it has had a long lasting impact on attitude to risk - and indeed on this particular vulnerability.
The proof will be in the price action that follows – gold has successfully breached important chart resistance (forming a triple top at $2725) on this short covering rally but is still shy of its all time high of $2790. Looking ahead, the differential between London and New York is already easing considerably … and with it prices will likely flat-line. And then perhaps decline a little. Early days but roughly what we are seeing just now. Then we go into range trading – I would suggest $2725/$2790 while the market works out the correct or 'fair value' level.
If we are right then gold will have risen 4% in January which is roughly in line with the long term average … before giving back a bit of those gains shortly thereafter.
For the rest of 2025 the market looks set for further gains – we forecast a rise of 21% with an average gold price of $2888 – see here for more details.
Quoting Lessings again “the true value of a man is not determined by his possession, supposed or real, of Truth, but rather by his sincere exertion to get to the Truth” … take this article in that same vein please.
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Ross Norman
CEO
Metals Daily
