Gold pops as dollar, yields fall; spot prices top $4.5k for first time since June

Gold jumped on Wednesday, with spot prices topping $4,500/oz for the first time since early June. The advance was driven by a slide in the dollar after the U.S. Treasury department stepped in to provide relief to bond markets.

Traders also parsed the latest Federal Reserve minutes, which showed many policymakers seeing rate hikes likely if inflation did not decline.

At 15:34 ET (19:34 GMT), spot gold climbed 4% to $4,508.28/oz, while gold futures advanced 3.3% to $4,567.94/oz. Both contracts hit their highest levels since May 29.

Treasury stems bond sell-off
The fixed-income space was in the spotlight on Wednesday, getting a major reprieve after the U.S. Department of the Treasury announced it would at least double buyback operations for long-dated bonds, sending the 30-year yield tumbling from nearly two-decade highs.

Effective September 9, liquidity support buyback operations for longer-dated nominal coupon securities (the 10-year to 20-year sector and the 20-year to 30-year sector) will double in size from $2 billion per operation to $4 billion.

“This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations,” the department said in a statement.
The move led to an immediate reaction across the longer-end U.S. Treasury yield curve, as traders snapped up bonds. The 30-year yield was last down 9.2 basis points to 5.193%, a day after hitting 5.337%, its highest level since June 2007.

Coming into Wednesday, longer-term bonds in particular had been caught up in a sell-off roughly since the Fed’s July interest rate decision, driven by inflation jitters due to rising oil prices and concerns over the massive amount of debt being issued by mega-cap companies to fund their artificial intelligence infrastructure spending. Shorter maturities had fared much better, helped by recent economic data that reduced expectations of imminent Fed rate hikes.

“The move to support liquidity conditions from the 10- year maturity out to the 30 will be financed by heavier bill issuance at the front-end of the fixed-income complex as the government debt total remains in a firm upward trajectory,” José Torres, senior economist at Interactive Brokers, said.

“Those shorter tenors are more influenced by the Federal Reserve’s monetary policy decisions rather than fiscal dynamics, and they shield Washington from being punished imminently for having sustained outsized budget deficits for almost three decades,” he noted.

“The measures are essentially a method of yield curve control designed to suppress long-term rates that are deemed too elevated and at risk of derailing the economic expansion,” Torres added.

The U.S. dollar index slumped in response to the slide in yields, helping boost gold. Lower rate environments tend to buoy the yellow metal as well.

Fed minutes show policymakers concerned about inflation
Turning to the U.S. central bank, precious metal market participants received the minutes of the Fed’s July meeting, which showed many policymakers seeing rate hikes likely if inflation did not decline. The Fed had held rates steady at that meeting, but three regional presidents had dissented with the move.

“In their consideration of monetary policy at this meeting, most participants supported maintaining the current target range for the federal funds rate. Participants generally thought that the information that would accumulate in the intermeeting period could provide more clarity, and correspondingly reduce uncertainty, about the inflation outlook,” the minutes said.

“Participants judged that their inflation outlooks were highly uncertain and that inflation risks were skewed to the upside. Many participants noted that the recent re-escalation of the conflict in the Middle East significantly clouded the inflation outlook. These participants remarked that a protracted conflict could prolong supply chain challenges and could put upward pressures on inflation,” the minutes added.

Middle East impasse continues
Looking at the Iran war, oil prices had pared their gains on Wednesday but still remained nearly 3% higher for the week. Brent crude futures, the global benchmark, were last up 0.2% to $91.20 a barrel.

The U.S. and Iran continued to remain at an impasse over the Strait of Hormuz, with both sides once again independently claiming control of the vital waterway.

President Donald Trump on Tuesday said that no talks with Iran were ongoing or scheduled and that a U.S. naval blockade remained in force, while Tehran denied negotiations.

“We have possession, complete control of the strait,” the U.S. leader told reporters on Wednesday. “Maybe at some point,” he added, when asked whether Washington and Tehran would restart talks.

Iran has demanded that the U.S. fulfill conditions such as ceasing hostilities across all fronts and unfreezing Iranian assets before the strait can be reopened. Iran has separately been working on a framework for management of the strait with Oman, and Trump earlier this week warned of possible military action against Oman if it interfered with U.S. efforts to reach a deal with Tehran.

Roushni Nair, Scott Kanowsky, and Jaiveer Shekhawat contributed to this article