Many gold investors are anxiously waiting to hear what rate decision will come out of the September meeting of the Federal Reserve. While the decision made may have an effect on the gold market, the impact is unlikely to be as durable as the effects of the current actions that the U.S. Treasury is already taking. We discuss some of them.
On September 9, the Treasury conducted its first bond buyback as it had previously announced. That buyback totaled approximately $5.2 billion, quite shy of the $6 billion target that had been set by Treasury Secretary Bessent.
When the Treasury starts buying back long-dated bonds, it is trying to force yields down towards a desired level so that the cost of government debt doesn’t spiral out of control. Yields are still close to 5%, setting the stage for even more bond buybacks as the Treasury tries to pull those yields lower.
The U.S. and the Bank of Japan intervened jointly to prop up the Japanese yen to save it from collapsing. The cost to the U.S. in this intervention? About $90 billion. Why would the U.S. intervene to support the yen?
Japan happens to be one of the biggest holders of U.S. long-dated bonds. As its currency struggled, the Bank of Japan was becoming increasingly inclined to sell some of its U.S. bonds to access the liquidity it needs to keep the yen afloat. Selling those bonds would have flooded the market and forced yields on U.S. debt to rise further, an outcome that the U.S. is desperate to prevent.
Third, Scott Bessent has floated the idea of the Treasury dipping into its approximately $1 trillion account it has at the Federal Reserve so that additional bond buybacks are conducted by the Treasury. While this hasn’t been done just yet, it is just a matter of time before the reserves of the Treasury held at the Fed are drawn down to finance bond buybacks in efforts to control the yield curve.
Now here is where all the above come together. Treasury bought back bonds to force the yield curve down. It shored up the yen to prevent Japan from selling its U.S. bonds. Treasury is planning to tap its reserves at the Fed to buy back more bonds.
All those measures indicate that the dollar is losing value and Treasury is working feverishly to slow the erosion of purchasing power. Fewer institutional buyers are willing to buy U.S. bonds in large enough volumes, so the interest/yield on those bonds has to go up to entice buyers.
You know what happens when a currency depreciates or loses its attraction: hard assets like gold become a highly sought-after store of value, and that explains why the price of gold hasn’t fallen as significantly as it otherwise might have reduced amid the sporadic escalations in the ongoing conflict in the Middle East.
Favorable conditions for a sizeable gold rally are lining up, and those who play the long game are positioning themselves for what is coming. But don’t be swept away just yet because, as the experienced analysts at entities like Numa Numa Resources Inc. will tell you, sentiment drivers like unfavorable news can cause wild swings in price.
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