Gold steadies near two-month high as Fed risk caps Treasury-fuelled rally

Gold held close to a two-month high on Thursday after the US Treasury’s surprise move to expand purchases of longer-dated debt knocked bond yields and the dollar lower, giving bullion its strongest macro tailwind in weeks.

Spot gold traded near $4,512 an ounce in early Asian dealings after touching $4,525.79, its highest since June 2.

Prices had surged more than 4% on Wednesday, while December US gold futures climbed to about $4,570.

Treasury buybacks change the rate backdrop

The Treasury said it would at least double the maximum size of liquidity-support buybacks for 10- to 30-year securities, lifting the cap from $2 billion to at least $4 billion per operation between September 9 and November 4.

That announcement helped pull the 30-year Treasury yield back towards 5.2% after it had reached its highest level since 2007.

The 10-year yield also retreated, while the dollar weakened against several major currencies.

Both moves are supportive for gold because they reduce the relative appeal of interest-bearing US assets and make bullion cheaper for overseas buyers.

The programme remains small relative to the roughly $31 trillion Treasury market.

Impax’s Ross Pamphilon sees its near-term impact as modest, with longer-term borrowing costs still dependent on the government addressing its fiscal position.

US debt adds another reason to own gold

The timing has added another layer to the rally. US gross national debt has now exceeded $40 trillion for the first time, reaching roughly $40.05 trillion. Debt held by the public stands at about $32.27 trillion.

That milestone is sharpening attention on rising interest costs, persistent budget deficits and the Treasury’s future financing requirements.

Gold has increasingly traded not only as an inflation hedge, but also as protection against concerns over sovereign debt and currency credibility.

OCBC strategist Christopher Wong expects the advance to be uneven after Wednesday’s powerful move, suggesting the Treasury action provides support without removing the risks facing bullion.

Fed minutes put a ceiling on the rally

The Federal Reserve provided the main counterweight.

Minutes from its July meeting showed several policymakers favoured a quarter-point rate increase, while many judged that tighter policy would probably be required if inflation failed to decline.

The Fed ultimately held its target range at 3.5% to 3.75%, with three officials dissenting in favour of a hike.

Markets still lean towards no change in September, with futures pricing implying roughly a two-thirds probability of a hold.

That leaves gold in an unusual position.

Lower long-term yields and a weaker dollar are providing immediate support, while the possibility of another Fed increase threatens to raise the opportunity cost of holding bullion.

Silver also advanced to around $67 an ounce. Platinum eased towards $1,817, while palladium traded near $1,339.