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Gold has surged back above US$4500 an ounce after the US Treasury announced it would significantly increase buybacks of longer-dated government bonds, sending bond yields lower and reviving demand for the precious metal.
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Bullion climbed a staggering 3.8 per cent in the US to more than US$4499 an ounce. The Treasury said it planned to at least double its buyback operations for longer dated bonds, a move that helped ease pressure in the bond market after the 30 year Treasury yield had reached its highest level since 2007.
The rally comes as investors remain focused on deteriorating US fiscal conditions and the economic uncertainty surrounding the Iran war. The Treasury’s announcement came only hours before it disclosed that US public debt had surpassed US$40 trillion for the first time.
For gold, the lower bond yields are particularly important because the metal does not generate income. When yields fall, the opportunity cost of holding bullion becomes less restrictive.
The rally has also flowed directly into Australian gold stocks. Ramelius Resources, Genesis Minerals, Regis Resources, Greatland Gold and Vault Minerals all recorded significant gains as investors piled into the sector.
The move comes alongside a sharp reversal in flows into gold-backed investment products. Australian gold ETFs swung from $253 million of net outflows in June to $238 million of inflows in July, the biggest turnaround on record in a month.
US physically backed gold ETFs also attracted roughly US$3 billion of net inflows in July following two consecutive months of outflows.
For Australian gold investors, falling bond yields, a weaker US dollar and renewed investment flows are combining to strengthen the backdrop for gold producers, although it’s yet to be deduced whether bullion can establish itself above US$4500 sustainably.
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