A Treasury Move That Sent Gold Soaring
A weak bond market is bullish for gold, not bearish. The proof is in the price action.
The Treasury said it will double its buyback of long-term treasuries - the 20 and 30-year bonds. It was buying $2 billion each time; now it will buy $4 billion. The moment the news came out, gold spiked, Bitcoin moved, and stock futures moved.
Many people called this QE or "QE light." It is not QE. The Fed announced nothing. This is the Treasury acting, and the Treasury has no printing press - it cannot create money out of thin air to buy long-term bonds. So where does the money come from? It sells more short-term bonds. It is financing the debt by buying back older long-term debt and replacing it with shorter-term debt.
Why This Is Reckless
The average coupon on long-duration debt (10 years and out) is 3.44%. The Treasury is replacing that cheap 3.44% debt with roughly 4% short-term borrowing, which raises refinancing risk. The 30-year rate was at 5.3, then moved below 5.2 (about 5.18); the 10-year sits around 4.6.
Why refinance debt locked in at 3.44% into 4% treasury bills? It is like someone with a 3.5% mortgage and 25 years left paying it off by taking out a one-year adjustable-rate loan. Nobody would be that dumb, except the government.
They are not doing this because they are dumb. They are doing it because they are scared. This is a panic move, a Hail Mary to stop long-term interest rates from rising by having the government buy the bonds everyone else is selling. The market does not want treasuries; it is selling them. Now the government is using taxpayer money to buy the treasuries the market is dumping. This is not a smart financial move.
The trade-off: it shortens the average maturity of the national debt, already just under six years, and that will get much shorter as the program grows. This is only the opening bid, the beginning, not the end. The real danger is the maturity wall the government is building on purpose.
The Trap This Sets for the Fed
This makes it much harder for the Fed to raise short-term rates, because the government itself is now more exposed to any increase - it has to keep refinancing all this short-term debt. It is kicking the can down the road, trading short-term relief for long-term pain. That pain arrives when the short-term debt matures and must be rolled over.
Who buys all those short-term treasuries the government sells? I think the Fed ends up buying them by launching a QE program. The Treasury alone will not buy enough long-term bonds to stop the rise in yields - it will slow it a bit, not stop it - so the Fed will join in. QE is coming. In fact, the Fed is already doing QE unofficially, and it will have to ramp it up. Clearly it will not be able to hike rates, because that would put monetary policy at odds with fiscal policy.
This resembles Operation Twist, which the Fed ran between QE2 and QE3 - selling short-term debt to buy long-term debt to push long-term rates down, since markets and the mortgage market were more sensitive to long-term rates. I called it "operation screw" at the time. This is the same thing, but the Treasury is doing it, not the Fed.
Inflation Is a Choice, and the Fed Will Choose It
Big deficits plus the government buying treasuries is a highly accommodative fiscal policy that complicates the Fed's effort to run tight money. The Treasury is now piling more upward pressure on inflation, making the Fed's job harder.
Kevin Warsh said inflation is a choice, and I agree. He acted as if the Fed will not choose inflation. From the start I said of course it will choose inflation, because it cannot choose the opposite. The Treasury already moving this direction makes it clear the Fed will follow.
The government helps the Fed create inflation by running big deficits. The national debt is at $40 trillion and rising sharply - a few days ago it was still about $80 to $100 billion short of that, then it moved up fast. This is what causes inflation. It is not the war itself; it is how we pay for the war. We did not raise taxes and did not cut other spending. We just spent. Bigger deficits mean more inflation, yet the Fed never names deficits or money printing as the cause. They talk about shrinking the balance sheet - but how can they, while running Operation Twist? They would have to sell back the very bonds the Treasury is buying. They will not fight the Treasury; they will coordinate and work together.
The FOMC Minutes and the Market Reaction
The FOMC minutes came out at 2:00 and were more hawkish than markets expected. There were dissenters who wanted to hike right away. The FOMC's view was that inflation is too high and more likely to go up. Some members blamed inflation on AI. The stock market does not cause inflation. AI does not cause inflation. The Federal Reserve causes inflation.
Without the morning buyback announcement, the stock market might have tanked, the bond market might have fallen, and yields might have risen, since nobody wanted to cut and people were talking about hiking. Instead, the market shrugged the hawkish minutes off, and the odds of a rate hike went down. Perhaps the Treasury knew the minutes would be hawkish and put out its move first to blunt the market impact.
The Gold and Silver Reversal
The market confirms this reading. Yesterday gold dropped about $80 and closed near the lows - its worst day in at least a month. Silver was down too. Today gold rallied about $185 and closed above $4,500. Last night it had been down about $20, so the intraday swing was roughly $200. It was a technical reversal: today took out yesterday's low, then closed well above yesterday's high. Gold is now about 13% above its low. It bottomed just below $4,000, the level I kept pounding the table on as the low to buy.
Silver closed above $66 an ounce, may have topped $67 earlier in the evening, and sat around $66.71 late at night. Gold was retreating about $20 but still traded above $4,500.
Mining stocks were on fire, many up 7, 8, 9, 10, 11, 12%. GDX and GDXJ were each up about 8% on the day, and both indexes are up close to 40% over the last month. They rose for the exact reason expected. Earlier, gold and gold stocks fell because people were fooled by the Warsh act - the "new sheriff in town" story that the Fed would be tough and drive inflation back to 2%. Markets called Warsh "Paul Volcker reincarnate." I said no, it is all talk. Look at what the Fed actually does: money supply, the balance sheet, and the fact that it was not hiking. The tough talk never matched sitting on their hands.
Why Rising Yields Are Bullish for Gold
As the Treasury shortens the debt's maturity, every rate hike inflicts more damage on the budget - the deficit goes up because it costs more to service the debt. So as the Fed tries to fight inflation, it plants the seeds for more inflation, because those bigger deficits ultimately get financed by the Fed.
People worried that rising bond yields were bearish for gold and silver. They are bullish. Rising yields force QE, weaken the economy, and cause bigger deficits. Yields were rising because of inflation. It was never a case of "I'd better sell gold to get 5% on a 10-year Treasury." Rising yields mean falling treasury prices, so owning treasuries means losing money. The response is to dump treasuries and buy gold. A weak bond market is bullish for gold.
The government says it wants lower borrowing costs, yet its strategy makes inflation harder to beat. Suppressing yields does not erase the debt; it shifts the cost onto future inflation and lost purchasing power. The free market wants higher rates for a reason: too much debt. The way to stop too much debt is to make borrowing more expensive. The government wants to block that so it can keep borrowing, which only makes the eventual crisis worse, because the bubble grows bigger than if the market had popped it sooner.
