Gold Rallies as UK's Starmer Resigns, Interest Payments Drive Huge Borrowing

GOLD and SILVER PRICES rebounded from 1-week lows on Monday as crude oil prices fell after Tehran and Washington agreed on a roadmap for a final deal to end the US-Iran war, while longer-term interest rates eased back, including in the UK, despite Prime Minister Keir Starmer announcing his resignation, writes Atsuko Whitehouse at BullionVault.

Silver touched $67 per troy ounce and spot gold in US Dollars rose as high as $4219, rebounding by 1.7% after falling on Friday to its lowest price since 11 June and recording gold's lowest week-end price in London since November. 

Gold priced in Euros rallied to hit €3679 on Monday, while the gold price in UK Pounds touched £3190 − rising by more than 72% since Starmer took office in July 2024.

Starmer's likely replacement, self-declared "business-friendly socialist" and former Mayor of Manchester Andy Burnham, last week rowed back on comments saying that the UK Government shouldn't be "in hock to the bond markets" following his return to Parliament by winning the Makerfield by-election.

But new data released Friday showed the UK needing to borrow more money last month than any May since the Covid pandemic lockdowns and record fiscal stimulus of 2020.

May's net budget deficit of £23.3 billion ($30.8bn) included £11.7bn in debt-interest costs, driven in part by rising payments on inflation-linked government Gilts.

"The UK's fiscal reality is deteriorating, further eroding policy flexibility" for Burnham or any other new Prime Minister, says Mohamed El-Erian, economist and adviser to German insurance giant Allianz.

Across the Atlantic, the US Treasury also blew past budget deficit expectations for May with net borrowing of $293bn, driven by a record monthly interest bill of $133bn.

"Interest costs will exceed $1 trillion this year and have nearly tripled from $345 billion in Fiscal Year 2020," the Committee for a Responsible Federal Budget warned in April.

Official-sector demand for gold meanwhile remained robust in May, led by Poland's purchase of 18 tonnes − the country's largest monthly addition since February, according to the mining industry's World Gold Council.

Other 'emerging-market' central banks adding to their gold reserves included Kazakhstan purchasing 7 tonnes, Uzbekistan 9 tonnes, Georgia 1 tonne and the Czech Republic 1.7 tonnes.

Data published earlier this month said that the People's Bank of China − the world's largest holder of foreign currency and other reserve assets at $3.4 trillion bank − added a further 10 tonnes of gold in May, its largest monthly purchase since December 2024.

"Today's rebound in bullion prices appears to be driven by comments from Iran's foreign minister," said a trading note from London bullion clearing bank ICBC Standard, part of China's giant ICBC bank.

Talks now begun in Lucerne, Switzerland show "major progress to end the Lebanon war," said Tehran's Abbas Araghchi on X, helping ease concerns that Israel's bombardment of Beirut would continue and jeopardise the US-Iran peace plan and block the re-opening of the vital Strait of Hormuz to crude oil tankers.

Announcing his resignation outside 10 Downing Street this morning after months of chaos in the UK's ruling political party, Starmer said nominations for a new Labour Party leader will open on 9 July and that a successor − who then becomes the UK's new Prime Minister by default − will be chosen by 1 September.

Friday's UK borrowing data saw Whitehall's borrowing costs on 10-year Gilts yield rise 4 basis points to a 1-week high of 4.85% per annum.

But that rate of interest then slipped back again today after Prime Minister Keir Starmer's resignation.