Physical Gold Demand in London Has Established A New Trend Of Running Gold's Price Higher While Bonds Fall on Higher Yields

Waiting for Bullion Bank Defaults as London Physical Demand Begins to Swamp Paper Promissory Note Sellers

On Friday August 16, 2024, the price of digital gold traded at $2,506 USD after hours in the spot market.

Friday’s price represents a new all-time high price for gold in USD.

In the following chart, where the blue line is monthly US 10 Year Treasury Yields and the yellow line is the monthly price of gold in US dollars, it can be seen that gold has shown 3 phases of trading in relation to bond yields.

In Phase 1, as 10-Year Treasury Yields fell (i.e. Treasuries increased in value), the digital gold price also increased in value.

In Phase 2, as 10-Year Treasury Yields rose off of their 2020 bottom (Treasuries decreased in value), gold consolidated its price.

Finally now, in Phase 3, as 10-Year Treasury Yields continue to stair-step generally higher and Treasuries lose value, gold’s digital price has turned higher to new all-time highs.

Figure 1. Digital Gold Monthly Price vs US 10 Year Treasury Monthly Yields

Even as the Fed’s CPI-U inflation measure has moderated over the last 2 years from its 2022 peak, the digital price of gold even now continues higher due to physical gold demand.

Market Bond Appetite Seems To Be Transitioning To An Appetite For Physical Gold Bars

The demand for physical gold in Q2 2024 has reached the highest level on record driven in part by large and strongly increasing bar delivery demands on the London Over-The-Counter (OTC) spot market even as retail market demand for gold coins and bars were middling during this period.

The London spot market has for decades served as a promissory note market that suppresses the gold price by providing artificial supply through issuance of paper gold notes many of which are unbacked by gold.

However when investors start to demand bar delivery, the out-sized standing paper leverage in London can have a leveraged upward impact on the price of gold as holders of the notes begin to demand bar delivery against comparatively small bar inventories.

The Bullion Banks Will Learn Leverage Works In Both Directions

If the demand for bar delivery in London and New York paper markets continues, we can expect to begin to hear reports of default by counter parties that have sold paper promissory notes for gold (and silver) into the market and are unable to deliver when delivery is demanded.

Physical bar demand collapses leveraged promissory note gold and silver markets.

A new market based on supply and demand negating paper markets will arise.

Stay tuned.

Best regards,

David Jensen