The price of gold continues its historic rally, reaching new record highs for the ninth time in 11 trading days. The surge comes as US inflation data remains strong, and the arbitrage gap between London bullion and New York futures widens.
Gold Hits New Highs Despite Inflation Pressures
On Thursday, prices climbed further against a weakening US dollar, with the London benchmark fixing at $2,016 per troy ounce in the morning auction—a new all-time high. This surge coincides with rising US stock and bond prices, despite hotter-than-expected inflation reports that suggest the Federal Reserve may delay interest rate cuts.
US producer price inflation (PPI) data released on Thursday exceeded expectations, with core inflation slowing only slightly to 3.6% annually. Headline PPI inflation, which includes energy and food, rose to 3.5%, its fastest pace since early 2023. These figures follow consumer price index (CPI) data earlier in the week that also surpassed forecasts, fueling concerns about prolonged inflationary pressures.
Despite these inflationary trends, the metal remains an attractive hedge against economic uncertainty, with market sentiment expecting sustained strength in prices. The rally is also driven by geopolitical tensions and central bank demand, which have kept investors bullish on the precious metal.
Arbitrage Between London and New York Markets Widens
One of the key factors influencing the recent price surge is the widening arbitrage between the London bullion market and New York’s Comex gold futures. The price gap between these two major markets, known as the NYLON arbitrage, expanded to nearly $30 per troy ounce on Thursday after briefly narrowing to $20 the previous day.
This discrepancy has driven increased inflows into Comex warehouses, with stockpiles rising 0.9% on Tuesday alone, reaching 1,133 tonnes—the highest level since the pandemic-induced gold rush of 2020. These inflows are driven by traders seeking to capitalize on the price difference by shifting physical gold from London to New York.
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The growing arbitrage gap has also pushed up lease rates, which reflect the cost of borrowing. Higher lease rates suggest tightening supply in the physical market, which could further support prices in the near term.
Demand Destruction in Key Gold Markets
While financial markets continue to drive prices higher, physical demand in key consumer nations is facing severe pressure. In India, the world’s second-largest market, record-high domestic prices are deterring buyers, particularly during the traditional wedding season, when gold purchases typically surge.
Domestic gold prices in India have soared above 86,000 rupees per 10 grams, making gold increasingly unaffordable for many consumers. As a result, wholesale dealers are offering significant discounts—up to $30 per ounce—to offset weak demand. According to Surendra Mehta, secretary of the India Bullion and Jewellers Association, jewelry demand has plummeted by 70-80%, with sluggish sales reported across the country.
A similar trend is playing out in China, the world’s largest gold consumer. On Thursday, the Shanghai gold premium over London prices narrowed to just $1.50 per ounce, indicating waning demand in the Chinese market despite record-high yuan gold prices.
Market Outlook: Interest Rate Speculation and Central Bank Demand
Looking ahead, investor sentiment toward gold will likely be influenced by expectations surrounding US monetary policy. While former President Donald Trump has urged the Federal Reserve to continue cutting interest rates, market consensus suggests that no changes are expected before September. However, the probability of a rate cut in July rose to 48.2% on Thursday, up from 41.9% earlier in the day.
Beyond the US, central banks remain a key driver of gold demand. Despite a recent slowdown in official purchases, many institutions continue to accumulate gold as a hedge against currency devaluation and geopolitical risks.
Silver Follows Gold’s Rally
Silver prices are also benefiting from the bullish sentiment in precious metals, holding above $32 per troy ounce. This marks an 11-year high, reinforcing silver’s status as a strong performer in the current market environment.
Conclusion
Gold’s meteoric rise highlights both the strength of financial demand and the challenges facing physical markets. While investors continue to pile into the metal as an inflation hedge, traditional consumer demand in India and China is showing signs of stress. The widening NYLON arbitrage and rising lease rates suggest potential supply constraints, but whether gold can sustain its upward momentum will depend on broader economic conditions and central bank policies in the months ahead.
