"Sold Already? That Must Sting"... Gold Surges 15% in a Month, U.S. Treasuries Behind the Rally [Weekend Money]

Gold Surges 15% in August

"Weak Dollar and Rising Appeal of Alternative Assets"

Gold is benefiting as markets demand higher interest rates, while U.S. policymakers struggle to keep rates contained. Since the United States has been issuing a substantial amount of Treasuries, rising rates inevitably lead to higher interest expenses. As a result, with policymakers working to limit further increases, the dollar is under downward pressure while gold prices are once again climbing.

Expectations for Fed Rate Hold and Treasury Buybacks Fuel Gold’s Sharp Rebound

According to Hana Securities, after a period of consolidation over the summer, gold prices have surged. As of the peak on August 25, prices were up approximately 15% for the month, with a sharp 7.4% jump in just the past week.

Youngjoo Lee, a researcher at Hana Securities, highlighted that there have been two major momentum shifts driving the gold rebound. The first was a sharp decline in expectations for additional rate hikes by the U.S. Federal Reserve. Until late July, the futures market had been pricing in a high probability of a rate hike in September, but that expectation quickly faded. As of August 26, the likelihood priced into the futures market for a September rate hold had climbed to about 64%.

The second driver was the U.S. Treasury’s move to expand long-term Treasury buybacks. Buybacks allow the Treasury to repurchase outstanding government bonds from the market, thereby improving market liquidity and alleviating supply-demand imbalances at particular maturities.

On August 19, the U.S. Treasury doubled the size of its long-term buybacks to at least $400 million per session. In the following week, yields on 30-year U.S. Treasuries fell by around 11 basis points (1bp = 0.01%), and the dollar weakened. Lee explained, “Gold prices, which had stalled due to high long-term rates, received fresh impetus from the expanded buybacks and began climbing again.”

Tug-of-War Between Treasury Oversupply and Rate Suppression

At the heart of gold’s resurgence lies the structural imbalance in the U.S. Treasury market. The United States continues to issue Treasuries to cover its budget deficit, but major buyers like foreign public entities and banks no longer have the ample liquidity they once did. To make matters worse, leading tech companies are siphoning up market funds like a black hole as they raise capital to build artificial intelligence (AI) data centers.

Scott Bessent, U.S. Secretary of the Treasury, is speaking at a press conference held at the Treasury Department in Washington D.C. Photo by Reuters Yonhap News

Lee explained, “In a typical market, this supply pressure would drive down bond prices, push up long-term rates, and eventually attract new buyers seeking higher yields. The problem now is that policymakers cannot simply accept the resultant higher rates. In an environment of expanded government debt, persistently high long-term rates raise the costs of refinancing and interest payments, and also increase the financial burden for households and businesses.”

He went on, “While the Treasury market is demanding higher rates to absorb the greater supply, policymakers are forced to limit the economic and fiscal fallout. As a result, there is a constant push-and-pull between the market and authorities over what yield level will clear the excess supply of U.S. Treasuries.”

This ongoing tug of war may be favorable for gold. Lee said, “When policy intervention suppresses rate increases, the risk premia required by investors aren’t fully reflected, which can dampen demand for Treasuries. Part of the adjustment that cannot take place in the bond market then spills over into currencies, placing added downward pressure on the dollar.”

He further explained, “The more policy intervention limits rate adjustment, the harder it is to know at what yields Treasuries would trade in an entirely free market. Repeated interventions increase uncertainty regarding the fair value of U.S. Treasuries and the credibility of policy, which in turn raises the relative appeal of alternative assets like gold.”

"Gold to Play Key Role in Asset Allocation in Second Half"

Gold’s place in asset allocation strategies is set to become even more vital in the second half of the year. Recently, nearly all investment focuses—whether in stocks or corporate bonds—have been clustered around the “AI theme,” and if the AI cycle were to falter, it would threaten the performance of entire portfolios. In this context, gold, which quietly benefits in times of market tug-of-war, can serve as an excellent shock absorber.

Lee noted, “As AI-driven investment expands beyond equities into corporate bonds, private credit, and infrastructure, different asset classes may still be exposed to the same investment cycle. Therefore, gold should not only be regarded as a hedge against inflation, but also as a vital asset for diversifying portfolios in the latter half of the year.”

This content was produced with the assistance of AI translation services.