By Peter Reagan
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- Gold passes $4,600: it has now gained $600 in 2 weeks
- The start of gold’s 2023 run from $1,650 to $5,500 looked exactly like this
- The Treasury’s “soft QE” is being blamed, but is there more to the story?
- U.K. would-be gold investors lament missing out as U.S. Mint runs out of coins
Gold is back above $4,600 – but 2023 is the better comparison than one headline
Gold has spent the last week around $4,600 after one of its strongest stretches of the year.
Reuters reported spot gold at $4,623.94 on August 21, capping a third consecutive weekly gain. The Wall Street Journal put the move at 14.2% over three weeks – nearly $600 per ounce from where gold price began.
That is the recent gold price update. The more interesting question is what it means.
I keep thinking about 2023 – but let me be precise about the comparison.
According to the World Gold Council, gold dipped below $1,900 in August 2023, recovered to $1,942 by month-end and finished the year at a then-record $2,078.40, returning 15% for the year.
What feels familiar is not the exact price chart. It is the backdrop.
In both periods, we were wrestling with unusually restrictive monetary policy, persistent inflation, questions about the dollar and strong central-bank demand for gold. Central banks have become such an important part of the gold story that I think their behavior deserves more attention than the latest analyst price targets.
Today’s environment is not identical. Yes, inflation remains stubborn, and the Federal Reserve is still debating whether interest rates need to stay pat or go up again. Now, that matters because gold pays no interest and historically can face headwinds when rates are high. Which is part of what makes the 2023 price surge so unusual – gold price rose despite higher rates. We were puzzled at the time…
Today, gold is holding around $4,600.
That tells me the better lesson from 2023 isn’t so much “Gold will repeat the same move.” Financial markets aren’t as tidy as that.
It is that gold can rise even when the interest-rate backdrop is unfriendly. If concerns about currencies, government debt and financial stability are strong enough, gold’s price responds.
For long-term savers, that distinction matters a whole lot more than somebody’s next $5,000 or $6,000 price target.
Treasury is buying back government debt – here’s what that means
The clearest catalyst for the latest leg higher came from an unusual place: The U.S. Treasury Department.
Treasury recently doubled its planned buybacks of older long-term government debt to as much as $4 billion per operation. The stated purpose is to improve liquidity and reduce pressure in a government debt market strained by rising borrowing costs.
Reuters reported that the announcement sent the dollar sharply lower while gold jumped more than 4%.
It is easy to see why people immediately reached for the phrase “soft QE.”
But I would stop short of calling it quantitative easing.
Traditional quantitative easing (QE) is a Federal Reserve action, where the central bank prints money to buy government debt. These Treasury buybacks are debt-management operations – no money is printed. Instead, long-term debt is retired in favor of cheaper, short-term debt. They can still influence borrowing costs and liquidity – and Reuters noted that some analysts see the program as resembling QE – but the mechanism is totally different.
That distinction is what makes this story more interesting than you might think at first glance.
The Treasury Department is intervening while federal debt has passed $40 trillion and long-term government borrowing costs have become increasingly problematic. My colleague Phillip Patrick discussed this very issue recently on an episode of War Room:
The Treasury Department’s buybacks may relieve a little pressure at the margin, but they do not reduce the underlying debt burden. They do nothing about the federal deficits that keep adding to the national debt.
It’s more or less like this. Let’s say your family has a 30-year, fixed-rate mortgage at 6%. Interest rates go down and you hear about a friend who just refinanced his mortgage with a five-year, adjustable-rate mortgage. That seems smart! Payments are lower, and hopefully rates will keep falling in the future – so you decide to do the same thing. Your mortgage payment drops $250 a month.
That’s good news, right? Well, yes! And no… The adjustable-rate mortgage exposes you to what we call interest rate risk. If interest rates go up, so will your payment.
At the same time, neither you nor your friend have lowered the total amount of debt. You still owe the same amount – you’re just paying for it on different terms.
The Treasury Department’s actions are debt payment management, not debt reduction.
Investors responded to the Treasury’s actions immediately – but not for long. Reuters reported that long-term borrowing costs began climbing again almost immediately.
Now, that is the part I’m watching.
Along with federal debt costs, the other things that started going up were gold and digital dollar alternative bitcoin. Reuters explained the response this way: “Some investors see in the Treasury’s actions the makings of currency debasement.“ And we can see that by the way safe-haven investments rose in price.
Gold did not suddenly become a must-have because of that single Treasury announcement. The announcement mattered because it touched the same nerves that have supported gold for years: Enormous (and growing) government debt, persistent inflation and doubts about the long-term purchasing power of our dollars.
Sometimes a headline causes a move.
But other times, a headline just reminds us of what we were already concerned about.
Western savers are developing gold FOMO (but don’t call it a bullion shortage)
Recently, there’s an interesting change happening at the precious metals retail level.
The Royal Mint surveyed people between July 31 and August 4 and found that an astonishing 33% regretted not investing in gold over the previous five years. (Just 8% said they had actually kept any savings in gold.)
That gap – between recognizing what gold has done recently and actually owning any – tells us something about just how unusual the last few years have been.
For much of gold’s rise, Western retail demand was not the main story. Central banks and buyers in Asia (mostly China and India) were far more important. Now, after gold has already climbed dramatically, more ordinary savers are looking backward and wondering whether they missed out.
There is a lesson there, but it is not “chase whatever just went up.”
In fact, the Royal Mint itself cautions that past performance does not guarantee future results. This is true with all investments and all assets – that’s why we say it so often.
The better lesson is about diversification. Gold’s role in savings does not depend on guessing the perfect entry price. Physical gold bullion is an asset with no issuer and no promise attached to it – fundamentally different from an asset priced on someone else keeping their word, closing a transaction or making a profit.
One more caution: You may have seen reports that the majority of the U.S. Mint’s 64 products were unavailable in mid-August. Yes, that sounds dramatic! But those products included annual sets, proof coins and limited-mintage coins. (Reminder: The U.S. Mint does not sell its standard bullion coins directly to the public.) The Mint rarely labels products officially “Sold Out.” Usually, instead they describe them as “Currently Unavailable,” which can be temporary. Sometimes buyers cancel orders. Sometimes the Mint makes more, if mintage caps allow.
On its own, this is not evidence of a national bullion shortage. Despite the 30% increase in U.S. gold bullion demand in the second quarter vs. last year, current pricing is not reflective of a shortage. There is one place where the word “tightness” is justified: Silver. The U.S. Mint says American silver eagles remain “on allocation.” In Mint terminology, allocation means available supply is being rationed among authorized purchasers, not supplied freely to all orders. (Gold eagles aren’t on allocation – at least not yet.)
Update: On August 27, the Financial Times reported that physical gold bullion demand from wealthy individuals is forcing some vault operators to expand capacity. Over-the-counter physical purchases have reached the highest levels in over a decade – higher than the pandemic panic.
Maybe Western gold demand is finally waking up? Private investors have been comparatively quiet during much of gold’s enormous run since 2023… Is that finally changing?
Only time will tell. I would call this another sign of heightened interest in precious metals at a time when questions about debt, inflation and purchasing aren’t going away any time soon.
That is the thread connecting all three stories this week.