The announcement from the US Treasury Department reignites the gold market. This is why the yellow metal has started to gain value again.
The intervention announced yesterday by the US Treasury Department in the bond market has caused an immediate rise in the price of goldwhich momentarily exceeded $4,500 an ounce.
The announcement of the Treasury and the blaze of gold
The price of gold reached a two-month high on August 19, reaching peaks close to $4,550 an ounce, before settling back to just below 4500 dollars in today’s session. The increase, above 4% in a single day, is directly tied to the announcement made by the US Treasury Department on Wednesday.
The American government has in fact officially communicated the doubling of buyback operations, i.e repurchase of liquidityon long-term nominal securities, from the initial 2 billion to “at least 4 billion dollars” for each single operation.
Simply put, the US Treasury buys back the debt it has issued, thereby injecting billions of dollars into the system.
Specifically, the intervention concerns i Treasury bonds American with maturity 10-20 years and 20-30 years. The measure will come into force operationally starting from 9 September and will continue until 4 November 2026.
The primary objective is support liquidity in a market segment that was under enormous pressure, so much so as to push up the yields of 30-year bonds reaching historic highs since 2007reaching the critical threshold of 5.33%, figures that yield very expensive for the government to finance its gargantuan public debt.
This massive intervention caused Treasury yields to drop sharply (American bonds) long-term and has contextually weakened the US currency. The announcement was therefore capable of powerfully and immediately reactivating international investment flows towards gold, interrupting a period of stalemate.
The mechanism: lower yields, weaker dollar
To understand the connection with gold we need to take a step back. Gold is an asset that It does not pay coupons or interest: holding it involves an “opportunity cost”, i.e. the return you give up compared to a more profitable alternative such as a Treasury.
When real rates (nominal rates net of inflation) fall, the opportunity cost falls and gold consequently becomes much more attractive. The massive purchase of bonds by the Treasury pushes up the price of securities and lowers their yieldscompressing real rates and making gold competitive.
In parallel, the move weakened the dollar, which lost value against the basket of currencies against which it is compared.
Now, since gold is priced globally in dollars, a weaker dollar makes it mechanically more convenient and economical for buyers trading in other currencies, such as the euro or yen, stimulating further global demand and pushing the price higher. Double track, same direction: lower real rates and softer currency push gold higher together.
The background picture
Behind the Treasury’s announcement lies a moment of extreme structural fragility for Washington’s finances.
The United States simultaneously reckons with bond rates at historic highs for the long term, public spending to repay interest on the national debt which has skyrocketed 1,100 billion dollars per year (an unsustainable fiscal burden that swallows up a large part of the federal budget’s revenue) and a total public debt that has recently exceeded the abysmal threshold of 40 trillion dollarsequal to 40 billion (125% of GDP).
This context of serious and growing fiscal imbalance is further aggravated by the concomitant Middle Eastern crisis, with oil prices still above 85 dollars a barrel.
In this scenario of total uncertainty, with out-of-control debt, skyrocketing financing costs and structural inflation that continues to be higher than the Federal Reserve’s target, the Treasury’s move seemed more than it is another thing to want to reassure the markets that the government will not allow a collapse of the bond market.
Consequently, global capital, frightened by the perfect storm gathering in the world’s largest economy, they find the only safe refuge in goldtangible and liquid, capable of preserving real purchasing power in a phase of profound stress on the economic-financial system.
