Gold rises after desperate signal from US government

Gold, silver and platinum jumped this week after the US Treasury came out with a notable announcement. From September, the US government will buy back twice as many long-dated government bonds, with maturities of 10 to 30 years.

The aim of this is to push down long-term yields, which have risen enormously in recent times. The 30-year yield on US government bonds, for example, recently climbed to its highest level in around 20 years. Following this announcement, we saw the yield respond with a considerable decline.

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The signal matters more than the yield decline itself

The scale of the yield decline, however, isn't such that you'd expect a price rise of around 3 percent in gold, silver and platinum alike. Yet that's exactly what happened. And that probably has more to do with the signal the US government is sending with this move.

This isn't a case of money creation, after all. It's mainly a matter of shifting money around. More important, however, is the signal: the US government is showing that it will intervene as soon as the market genuinely calls for it.

With this, the market once again receives a degree of confirmation that the US government won't accept a recession without a fight. If support is needed to keep things standing, that support will come. That's probably why we're seeing gold, silver and platinum react so positively to this announcement.

You could say that in this move by the Treasury, the market reads an intention to do even more in the near future to suppress long-term yields.

For now, this development is extending the strong month the precious metals complex has enjoyed. Silver is clearly taking the lead there, as it usually does as the most volatile of the three, while gold and platinum also posted very attractive returns.

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Gold beats chip stocks by more than 20 percentage points

The situation becomes even more interesting when you compare gold's returns over the recent period with those of chip stocks. Over the past two months, gold posted a return of more than 11 percent, while the chip index (SOX) had to swallow a negative return of more than 11 percent.

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Although it's still too early to draw conclusions about a changing of the guard between precious metals and chip stocks, these are precisely the developments gold investors should be hoping for. In financial markets, a great deal comes down to momentum.

That now appears to be cautiously returning to the precious metals complex. Cautiously, because real confirmation is still to come — just as it remains to be seen whether the US Treasury's announcement can deliver a lasting reduction in long-term bond yields.

Why high yields ultimately work in gold's favour

A decline in those yields is important for gold, particularly in the short term, because it gives investors an alternative. If investors can get more than 5 percent on US government bonds, that represents competition for gold, which of course pays no interest.

On the other hand, higher bond yields actually create a positive story for gold over the longer term. After all, they mean the US government has to pay higher interest on its national debt. As a result, interest costs rise and annual budget deficits widen further, which means it has to take on even more debt to plug the gaps.

That's ultimately how you get the negative debt spiral that, for many investors, is reason to take shelter (at least partly) behind the natural scarcity of gold and other precious metals.