Gold hovered around $4,500 an ounce on Thursday as investors weighed the benefit of falling long-term U.S. Treasury yields against lingering concerns that persistent inflation could keep the Federal Reserve on a restrictive policy path.
The precious metal eased from its recent peak, although an expanded U.S. government bond-buyback programme, a subdued dollar and expectations of potentially easier financial conditions continued to provide support.
At 02:37 ET (06:37 GMT), XAU/USD declined 0.7% to $4,491.95 an ounce. Gold futures moved in the opposite direction, edging 0.1% higher to $4,549.14. XAG/USD added 0.1% to $67.08 an ounce, while XPT/USD dropped 0.8% to $1,807.32. The U.S. Dollar Index was broadly steady at 98.82.
Treasury action gives bullion support after Wednesday’s surge
Gold’s latest moves follow a surprise decision by the U.S. Treasury to increase the scale of buybacks involving some longer-dated government securities.
By doubling the size of certain liquidity-support operations, the Treasury generated additional demand for long-term debt and helped pull yields lower. The development provided further support for bullion after prices surged more than 4% on Wednesday.
Lower government bond yields tend to benefit gold because the metal itself offers no interest payments. When Treasury yields increase, investors can earn more from holding government debt, making bullion relatively less attractive. Falling yields reduce that opportunity cost.
The softer U.S. dollar provided another tailwind. Because international gold prices are denominated in dollars, weakness in the currency generally makes bullion more affordable for buyers elsewhere.
Record U.S. debt puts fiscal outlook under scrutiny
The Treasury’s intervention comes alongside growing attention on America’s fiscal position after total government debt exceeded $40 trillion for the first time.
According to the Treasury Department, the milestone has been reached as government expenditure on social programmes and interest payments continues to increase, while tax reductions have also affected revenue.
The scale of the debt burden is adding to concerns about future borrowing requirements and the cost of servicing government liabilities if interest rates remain elevated.
ANZ analysts said the expansion of Treasury buybacks indicates that policymakers are seeking to lower borrowing costs. Expectations of easier financial conditions would normally strengthen the investment case for gold.
The bank also pointed to bullion’s recovery from the $4,000-an-ounce level briefly reached last month, with renewed investor inflows and central-bank purchases contributing to the rebound.
Fed minutes prevent investors from dismissing rate risk
The Federal Reserve remains the main counterweight to the supportive bond-market backdrop.
Minutes from the central bank’s July meeting showed that several policymakers were prepared to raise rates, while “many” believed further tightening would be necessary if inflation failed to return towards the Fed’s 2% target.
Markets still see an unchanged policy rate as the more likely outcome in September. CME FedWatch indicates a 67.3% probability that the Fed holds rates steady, compared with a 32.7% chance of an increase.
Those expectations are particularly important for precious metals. Higher interest rates tend to strengthen the appeal of yield-bearing assets relative to gold, while easier monetary policy usually improves bullion’s relative attractiveness.
Central-bank purchases add longer-term support
Beyond short-term movements in rates and currencies, central-bank demand continues to strengthen the longer-term case for gold.
A World Gold Council survey found that 45% of central banks intend to add to their gold reserves, with inflation risks and geopolitical uncertainty among the principal motivations.
That institutional demand, combined with concerns about U.S. government finances and lower Treasury yields, is helping gold remain close to historically elevated levels.
For now, however, the balance between easier financial conditions and the possibility of additional Federal Reserve tightening is likely to remain a key influence on the next move in bullion.
Leave a Reply