Gold is higher by another $65 to $4668 in the third large gain in the past four trading days. That’s helped to lift gold to the highest since May 17 and up more than $600 since the start of the month.
Familiar themes are driving the gold bid, namely the US effectively abandoning the ‘strong dollar’ policy by pursuign intervention in the yen. In addition, the Treasury is attempting to intervene in the bond market to drive yields lower. That somewhat backfired last week as yields went right back up despite an Operation Twist type move.
A new report says the Treasury may tap its cash account to fund buybacks, something that could allow them to buy the long end without issuing more bills. Normally, buybacks are meant to be neutral and this would be edging towards debt monetization.
To some degree it’s working today with 10-year yields down 3.8 bps to 4.70%.
A second problem is the rumor mill saying that the Treasury has threatened allies who have teased at selling Treasuries. Japan was reportedly close to selling bonds to pay for intervention before Bessent stepped in. There is also talk that Saudi Arabia threatened to sell USD bonds if the US escalated in Iran.
Even the rumors are a problem for the US government as weaponization of the dollar could immediately result in allies buying fewer Treasuries because of the possibility that they wouldn’t be allowed to sell them when they need cash the most. Instead, the optimal reaction is to diversifty — at the margin or en masse — into gold.
The 15% rally since the start of the month suggests that central banks are buying or being front-run by the market.
I find it hard to fade this move but would be more enthusiastic about buying it if the Iran war ends. The war itself is certainly a reason to doubt dollar dominance but the threat of a runaway jump in oil prices is ever-present and that could cause countries to sell gold reserves (or Treasury reserves) to pay for oil imports or stabilize currencies. Turkey sold gold reserves early in the war and is a large holder.
This article was written by Adam Button at investinglive.com.