Gold’s Reaction To Bessent’s Announcement
Treasury Secretary Bessent said Wednesday that Treasury would roughly double long-dated buybacks (of U.S. Treasuries) to at least $4 billion per operation beginning in September. The bond market responded strongly, and so did gold, while the U.S. dollar fell sharply against other fiat currencies. Why?
The markets apparently see more than is readily apparent. The plain facts of the action pale considerably when you consider these facts...
- $4 billion is a drop in the bucket compared to the total market for U.S. Treasuries, which totals something north of $31 trillion. The proposed monthly buyback addition is the equivalent of .000129% - not exactly a substantial amount.
- Government intervention and manipulation in the currency and credit markets are part of day-to-day activities. Why should an insignificant amount of activity generate such big reactions?
Part of the answer might be that the markets are looking beyond the specifics at an assumed effort by Treasury to contain yields, especially long-term ones, where a large amount of Treasury debt is concentrated. Treasury has also emphasized that the buyback program is not about altering maturities as much as it is designed to improve liquidity.
That is well and good, but is it deserving of the strongly positive upward spike in bond prices today? Remember, the U.S. government continues to run huge deficits and continues to inflate the currency and credit markets by issuing infinite amounts of debt which continue to grow exponentially.
WHAT ABOUT GOLD AND THE DOLLAR
For the U.S. dollar, traders must have thought the bugler had sounded retreat. Similar action followed Secretary Bessent's announcement that the U.S. had intervened in the currency markets to help prop up the Japanese Yen less than two weeks ago, ostensibly to limit volatility in the markets. Is Treasury's latest foray into battle a reason to expect dollar weakness? Or just the opposite? If the Treasury is serious about curbing inflation, that would seem to be positive for the U.S. dollar.
As far as gold is concerned, the action resembled poking a sleeping bear. Apparently, the bear had not gone back to sleep. Some of gold's reaction is certainly tied to a weaker dollar, although gold remains down nearly 20% from its peak price earlier this year.
MY OPINION
Treasury Secretary Bessent's remarks earlier this month and Wednesday indicate justifiable concern about two major issues affecting the financial markets: volatility and liquidity. Dealing with these issues is more difficult when viewed through the lens of credibility as it applies to Treasury and its limitless appetite for deficits and debt.
Regardless of statements and respective actions, the risks of more volatility and collapse in bonds and stocks remain heightened. (see Bond Market Crack Widens)
The current higher prices in gold and silver are possibly overdone. They might go higher temporarily, but their peak prices earlier this year are not likely to be exceeded for the remainder of this year and possibly all of next year. (see Stubborn Gold And Slumping Silver)
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