Why is gold rallying and could US debt fears send it to $5,000?

Gold climbed on Friday and was set for a third straight weekly gain as a weaker dollar and concerns over US fiscal policy kept demand for bullion firm, even as Treasury yields rebounded from their midweek lows.

Spot gold traded near $4,540 an ounce in Asian hours after reaching its highest level since early June on Thursday.

The metal has gained about 3.6% this week, while US gold futures advanced towards $4,594. Silver, platinum and palladium were also heading for weekly gains.

Treasury buybacks revive the debasement trade

Gold’s latest leg higher began after the US Treasury said it would at least double the maximum size of liquidity-support buybacks for 10- to 30-year securities, from $2 billion to at least $4 billion per operation beginning September 9.

The announcement initially drove long-dated yields sharply lower and weakened the dollar, although much of the bond-market relief has since faded.

The 10-year yield was back near 4.7% on Friday and the 30-year around 5.25%, underscoring persistent concern over the US fiscal outlook.

That leaves the dollar as an important part of gold’s support.

The currency was heading for a weekly decline and traded near a three-month low, making bullion cheaper for buyers outside the US.

Citi strategist Dirk Willer sees the renewed debasement trade strengthening the case for gold, with fiscal concerns, a softer dollar and unstable long-term rates supporting demand for scarce assets.

Citi has also flagged scope for bullion to reach $5,000-$6,000 over the next year.

Fed policy remains the main ceiling

Gold’s rally still faces an important constraint.

Minutes from the Federal Reserve’s July meeting showed deeper concern over inflation, with policymakers discussing further tightening if price pressures failed to move convincingly towards the 2% target.

The labour market has also given officials little reason to rush towards easier policy.

Initial jobless claims fell by 6,000 to 206,000 in the week ended August 15, suggesting layoffs remain limited despite July’s surprisingly weak employment report.

Futures markets still favour no change at the Fed’s September meeting, though the possibility of another increase has not disappeared.

Higher policy rates generally weigh on gold because the metal offers no interest income.

Fiscal and geopolitical risks keep haven demand firm

The longer-term backdrop remains supportive. US gross federal debt has moved above $40 trillion, intensifying scrutiny of deficits, interest costs and the volume of government borrowing.

Council on Foreign Relations senior fellow Rebecca Patterson sees efforts to restrain long-term yields as unlikely to have a durable effect without broader policy changes or a meaningful slowdown in the economy.

That leaves fiscal risk firmly embedded in the gold story even if Treasury buybacks calm markets temporarily.

Geopolitics adds another layer. Treasury Secretary Scott Bessent has signalled a significantly tougher sanctions campaign against Iran as the conflict continues to disrupt energy markets and shipping around the Strait of Hormuz.