Gold Winning, Dollar Losing

Precious metals are finishing the week with some serious momentum, and the catalyst this time is coming straight from the U.S. Treasury market.

Gold has surged back toward and even above the $4,600 level and is now up roughly 5% on the week, putting the yellow metal on track for a third consecutive weekly gain. Silver is participating in a big way as well, pushing through $69 and trading around the $70 level as we record.

That represents quite a turnaround from the brutal correction precious metals investors endured earlier this summer.

The latest move began after the Treasury Department announced it would substantially increase its purchases of longer-dated Treasury securities through its so-called liquidity support buyback program.

The Treasury will double the maximum size of individual buybacks in the 10-to-20-year and 20-to-30-year maturity ranges, from $2 billion to $4 billion per operation. The expanded program is scheduled to begin September 9th.

Now, Treasury officials can describe this as improving market liquidity or maintaining market plumbing.

But the mechanics aren't particularly complicated.

The Treasury will step into the market and become a larger buyer of older long-term government bonds. More buying pressure means higher bond prices – and higher bond prices mean lower yields.

And the announcement came at a very interesting moment.

The 30-year Treasury yield had climbed as high as 5.34% this week, its highest level since 2007. After the Treasury announced the expanded buybacks, that yield quickly dropped back toward 5.2%.

In other words, the bond market was demanding substantially higher compensation for lending money to Washington for three decades.

This news really fell flat – and rang some alarm bells.

The actual dollar amount involved isn't enormous relative to the roughly $32 trillion Treasury market. But the signal being sent could be much more significant.

The Treasury has demonstrated that when long-term interest rates become sufficiently uncomfortable, the government is prepared to intervene directly in that part of the market.

Precious metals investors immediately took notice.

Gold jumped back above $4,500 following the announcement for the first time in roughly two months. The rally has accelerated since then, with gold approaching $4,600 this morning and silver breaking out to nearly $70.

The dollar has also weakened, with the Dollar Index falling below 99, providing another significant tailwind for gold and silver.

While the Treasury is making these dramatic moves, not the Federal Reserve, it's just another form of government intervention designed to influence interest rates.

And that matters because Washington has an increasingly powerful incentive to prevent its borrowing costs from getting out of control.

The national debt has now crossed an astonishing $40 trillion, while annual federal interest expense has already exceeded $1 trillion.

At some point, the arithmetic becomes very difficult.

The government needs to sell enormous amounts of debt to finance enormous deficits. But investors are increasingly demanding higher yields to absorb that debt.

Higher yields then make servicing the debt even more expensive, requiring still more borrowing.

That creates an obvious incentive for policymakers to find ways to push those yields back down.

And that's where this week's development becomes particularly interesting for precious metals investors.

Gold doesn't pay interest. So, all else being equal, rising real interest rates tend to make bonds more attractive relative to gold.

But if policymakers begin actively suppressing long-term yields while inflation remains elevated, the equation changes dramatically.

The return available on government debt becomes less attractive, while concerns about currency debasement and fiscal sustainability become more pronounced.

That is almost tailor-made for gold.

And the market appears to understand that.

Even with the 10-year Treasury yield still hovering near 4.7% this morning, gold and silver are surging. That suggests investors aren't merely trading a few basis points of movement in interest rates. They're beginning to focus on the larger fiscal picture.

There are still plenty of crosscurrents.

Oil remains elevated amid continuing tensions with Iran and disruptions around the Strait of Hormuz. Higher energy prices could keep inflation pressures alive, potentially forcing the Federal Reserve to maintain a tighter monetary stance than markets would otherwise expect.

Fed officials have also continued to signal that another rate hike remains possible if inflation refuses to cooperate.

So, this isn't necessarily a straight-line move higher for the metals.

But the development in the Treasury market this week may be giving investors a glimpse of a much bigger problem.

Washington is caught between high inflation on one side and an increasingly expensive mountain of debt on the other.

Allow interest rates to rise too far, and servicing $40 trillion in debt becomes increasingly painful.

Push rates artificially lower, and you risk weakening the dollar, encouraging inflation, and driving investors toward alternative stores of value.

Gold benefits from that dilemma either way.

And increasingly, so does silver.

After lagging during portions of the recent precious metals move, silver has come roaring back, climbing toward $70 and compressing the gold-to-silver ratio to around 66.

So, as we close out the week, investors should keep an eye not only on gold and silver prices, but on the bond market.

The message coming from Washington this week was significant.

When long-term borrowing costs get uncomfortable enough, the government is willing to intervene.

And with $40 trillion in debt and counting, this won't be the last time policymakers find themselves trying to keep a lid on interest rates.

For precious metals investors, that may ultimately be the biggest story of all.

Let’s take a look at the specifics of the weekly market action here and where we stand at the moment.

Gold is up about $230 to check in at $4,618 advancing a robust 5.3% now since last Friday’s close. Silver is oscillating on either side of $70 and currently trades above it at $70.18, up nearly $5 on the week or 7.3%.

Turning to the PGMs, platinum is showing an outsized gain of 7.9% and comes in at $1,893, while palladium is up a more muted 2.0% to trade at $1,360 an ounce.

And finally, copper appears to be making a run back towards its all-time high of roughly $6.80. Dr Copper, as they call it, currently checks in now at $6.58 per pound.

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