Gold remained close to the $4,500-an-ounce mark on Thursday after pulling back from recent highs, with lower long-term U.S. Treasury yields continuing to provide support following an expansion of the government’s bond-buyback programme.
A subdued dollar and expectations that financial conditions could become less restrictive also helped underpin bullion. However, investors remained cautious after the Federal Reserve’s latest meeting minutes showed policymakers were still concerned about persistent inflation.
At 02:37 ET (06:37 GMT), XAU/USD was down 0.7% at $4,491.95 an ounce, while gold futures edged 0.1% higher to $4,549.14. XAG/USD gained 0.1% to $67.08 an ounce, while XPT/USD fell 0.8% to $1,807.32. The U.S. Dollar Index was broadly unchanged at 98.82.
Treasury buybacks lower yields and provide support for gold
Gold’s latest moves followed an unexpected announcement from the U.S. Treasury that it would double the size of some liquidity-supporting buyback operations involving longer-dated government debt.
The additional demand helped drive long-term Treasury yields lower, providing another favourable influence for bullion after gold prices surged by more than 4% on Wednesday.
Movements in government bond yields are particularly important for precious metals because gold does not generate interest. Higher Treasury yields increase the potential returns available from bonds, raising the opportunity cost of holding bullion. Falling yields have the opposite effect, making non-yielding gold comparatively more attractive.
A relatively weak dollar offered additional support. Because gold is priced in dollars, a softer U.S. currency can make the metal less expensive for buyers using other currencies.
U.S. debt milestone adds to fiscal concerns
The Treasury’s intervention comes as investors pay closer attention to America’s deteriorating fiscal position. Total U.S. government debt has exceeded $40 trillion for the first time, according to the Treasury Department.
The milestone has renewed concerns over the sustainability of government finances as spending on social programmes and interest payments continues to rise, while revenues have also been affected by tax reductions.
ANZ analysts said the enlarged Treasury buyback programme suggests policymakers are seeking to reduce borrowing costs. The prospect of easier financial conditions would typically be supportive for gold.
ANZ also noted that bullion had already begun recovering after briefly touching $4,000 an ounce last month. Renewed investor interest and continued central-bank purchases have helped drive the subsequent rebound.
Fed inflation concerns keep interest-rate risk in focus
While falling yields have provided support, the Federal Reserve’s July meeting minutes showed that policymakers remain alert to inflation risks.
Several Fed officials were prepared to raise interest rates, while many indicated that tighter policy would be required if inflation failed to move back towards the central bank’s 2% target.
Markets are nevertheless assigning a 67.3% probability to the Fed keeping interest rates unchanged at its September meeting, compared with a 32.7% probability of an increase, according to CME FedWatch.
The direction of monetary policy remains critical for bullion. Higher interest rates generally make interest-bearing investments more competitive with gold, while a shift towards easier monetary conditions tends to reduce the opportunity cost of holding the precious metal.
Central banks continue to underpin longer-term gold demand
Beyond monetary policy, geopolitical uncertainty and concerns about the global economy continue to support strategic demand for gold.
A World Gold Council survey found that 45% of central banks intend to increase their gold reserves, with inflation and geopolitical uncertainty among the main reasons cited.
The combination of central-bank buying, fiscal concerns and lower Treasury yields is therefore providing support for bullion, although the possibility of further Federal Reserve tightening remains an important constraint on the near-term outlook.