When I last mentioned gold, almost two weeks ago, it was trading close to $4,400/oz, up quite a bit after having fallen below $4,000 in mid-July The reason for calling attention to the movement in its price was that yields on 30-year Treasuries had been rising, reaching 5.22 percent in what was then the most recent auction, the highest rate since 2001.
The yield on the 30-year peaked at around 5.33 percent a few days later, even as the Treasury had started buying longer-dated bonds using short-term money to do so. It took the announcement that this buying would be larger and more prolonged than first indicated to send yields down to, at their lowest point, 5.19 percent or so for 30-year Treasuries. Much of this easing soon faded, only to resume again because, it is thought, of lower oil prices and more Treasury buying at the long end. The 30-year is yielding around 5.18 percent today.
The weight of buying (or its prospect) will work, but for how long? Such maneuvers are more likely to undermine confidence than build it. They were portrayed as efforts at “liquidity management.” But, as Stanley Druckenmiller, a billionaire investor who was once a mentor to, well, Treasury Secretary Scott Bessent, noted in the Wall Street Journal, there was no evidence that any such management was required. Rather, the Treasury was undertaking price management, something very different.
Prices, as Friedrich Hayek observed, send a valuable signal. “Managing” them, to use a euphemism, is to suppress valuable information and is all too likely to end in a shambles. That’s why price controls can so easily lead to shortages. Money has a price too: the interest rate a borrower will have to pay to get hold of it. The amount that a government has to pay on a bond or any other loan sends a signal to the borrower, the market, and other onlookers too.
Druckenmiller:
Democracies don’t repair their finances because a budget office publishes a table. They repair them only when the cost of inaction becomes visible and immediate, when mortgage rates bite, when auctions tail, when the political price of a rising long bond finally exceeds the political price of touching spending…
Every basis point of artificial yield suppression is a subsidy to procrastination.
That the Treasury wanted to “manage” the signal sent by rising long-term yields was itself a signal, and not a good one.
Meanwhile, the dollar (as measured by the DXY index) is still off its Iran-war highs, and gold, after easing a little, has resumed its upward course. It’s trading at around $4,700 now, indicating that fears about a U.S. debt crunch (a key driver of higher rates) — and, for that matter, about the finances of various other countries — are still with us.
Economist Robin Brooks put it this way late last week:
The US Treasury’s efforts to play with debt issuance to cap long-term yields adds fuel to this fire, because . . . it signals an unwillingness to do what’s really needed (reign in the deficit) and instead resorts to financial engineering to cap yields. Markets take a dim view of this and so it’s no surprise that precious metals are up sharply since the buyback announcement.
He added today that:
The more high-debt countries blunder into artificial yield caps, which is where the US is heading, the more markets seek safe havens from debt monetization.