Gold prices held near a more than two-month high on Thursday, supported by lower U.S. Treasury yields after the government announced larger buybacks of longer-dated debt.
A softer dollar and renewed expectations of easier financial conditions also supported bullion. However, investors remained focused on the Federal Reserve’s still-hawkish stance toward inflation.
At 22:37 ET (02:37 GMT), XAU/USD fell 0.7% to $4,491.35 an ounce after touching an intraday high of $4,527.67.
Gold Futures edged up 0.1% to $4,548.51. XAG/USD was little changed at $66.99 an ounce, while XPT/USD fell 1.1% to $1,801.42.
The US Dollar Index was up 0.1% at 98.84.
Summary
Gold remained close to a two-month high after a larger U.S. Treasury buyback program pushed long-dated government bond yields lower.
Lower yields reduce the opportunity cost of holding non-yielding assets such as gold. A relatively soft dollar also provided support.
At the same time, the Federal Reserve continues to warn about inflation risks. Several officials remain open to higher interest rates if inflation fails to return toward the 2% target.
Central-bank demand and broader geopolitical uncertainty continue to support the longer-term outlook for bullion.
Treasury buybacks push yields lower and support bullion
Gold’s latest move followed a surprise announcement from the U.S. Treasury.
The government said it would double the size of some liquidity-support operations involving longer-dated government debt.
The additional demand helped push long-term Treasury yields lower. This gave bullion renewed support after prices jumped more than 4% on Wednesday.
Why lower Treasury yields matter for gold
The relationship between bond yields and gold is important because gold does not pay interest.
When Treasury yields rise, government bonds offer investors a more attractive income stream. This increases the opportunity cost of holding bullion.
When yields fall, that opportunity cost declines. Gold can therefore become relatively more attractive to investors.
The dollar also remained subdued. A weaker U.S. currency can support dollar-denominated commodities by making them cheaper for buyers using other currencies.
U.S. government debt passes $40 trillion
The move comes against a broader backdrop of rising concern over U.S. public finances.
Total U.S. government debt has now surpassed $40 trillion for the first time, according to the Treasury Department.
The milestone has renewed concerns about the sustainability of the country’s fiscal position.
Spending on social programs and interest costs is increasing faster than government revenue. Tax cuts could add further pressure to the fiscal balance.
As government borrowing requirements rise, Treasury-market liquidity and long-term borrowing costs become increasingly important for financial markets.
Treasury policy may signal a push for easier financial conditions
ANZ analysts said the Treasury’s larger buyback program suggests policymakers want to reduce borrowing costs.
Lower government bond yields can contribute to easier financial conditions across the economy.
Such an environment is typically favorable for gold because it reduces the relative attractiveness of interest-bearing assets.
ANZ also noted that bullion had already started recovering after briefly touching $4,000 an ounce last month.
Renewed investor demand and continued central-bank buying have helped drive the rebound.
Fed inflation risks remain in focus
Lower Treasury yields are supportive for gold, but monetary policy remains an important counterweight.
The Federal Reserve’s latest meeting minutes showed that inflation continues to constrain policymakers.
Several Fed officials were prepared to raise interest rates. Many also said another increase could become necessary if inflation fails to move toward the central bank’s 2% target.
Markets are nevertheless pricing in a 67.3% probability that the Fed leaves rates unchanged at its September meeting.
The probability of a rate increase stands at 32.7%, according to CME FedWatch.
Fed policy remains crucial for gold
The balance between inflation risks and financial conditions will remain an important driver for gold prices.
Higher interest rates generally weigh on bullion because they increase returns available from bonds and other interest-bearing assets.
A more accommodative policy environment tends to reduce that disadvantage.
As a result, changes in Treasury yields and expectations for Federal Reserve policy can have a significant impact on precious-metal markets.
Central banks continue to support long-term gold demand
Geopolitical and economic uncertainty is also supporting demand for gold.
A World Gold Council survey found that 45% of central banks plan to increase their gold reserves.
Respondents cited rising inflation and geopolitical uncertainty as important reasons for holding more bullion.
Central-bank purchases have become an increasingly important structural source of demand in the gold market.
What investors should watch next
Treasury yields will remain one of the most important short-term indicators for gold.
A continued decline in long-term yields could support bullion by reducing the opportunity cost of holding non-yielding assets.
The U.S. dollar is another key factor. Sustained dollar weakness would generally provide additional support for precious metals.
At the same time, investors should monitor Federal Reserve communication closely.
A renewed shift toward higher rates could pressure gold, while signs of easier monetary conditions would likely strengthen the bullish case.
Central-bank demand, U.S. fiscal concerns and geopolitical uncertainty also remain important longer-term drivers.
For now, gold remains supported by the combination of lower yields, strong structural demand and continued uncertainty over the global economic outlook.
