Precious metals are back in the spotlight
Gold and silver have come back to life in August, and this rally looks different from a simple bounce off the lows.
Gold traded near $4,466 an ounce at the time of the source report, up around 11% this month. Silver has moved even faster, climbing roughly 16.5% in August to around $66 an ounce.
Both metals are still well below the extraordinary highs they reached in January. Gold had fallen roughly 30% from its peak by the end of June, while silver suffered an even deeper drawdown of about 55% before turning higher.
That matters because neither market entered August looking overheated.
The latest rally is being driven by something much bigger than momentum: growing concern over the amount of debt the U.S. is issuing and what that eventually means for the dollar.
$40 trillion changes the conversation
The U.S. national debt has now crossed $40 trillion, reaching that level roughly two years earlier than Congressional Budget Office projections cited in the source.
At almost the same time, the Treasury announced that it would double buybacks of 10- to 30-year debt to at least $4 billion per operation beginning September 9.
Those buybacks are designed to improve liquidity in the Treasury market, not erase the debt. But the timing caught investors’ attention because long-term government borrowing costs had already been moving sharply higher.
The 30-year Treasury yield reached its highest level since 2007 before easing after the announcement.
That combination is important.
Normally, U.S. government bonds are where investors go for safety. When investors instead begin worrying about the amount of debt being issued, the cost of financing that debt and the long-term value of the currency it is denominated in, gold starts looking more attractive.
This is the basic idea behind the debasement trade.
It doesn’t mean the dollar suddenly collapses. It means investors begin looking for assets that cannot simply be created in larger quantities when governments need more money.
Gold fits that description extremely well.
Lower rate expectations are adding fuel
The debt story isn’t happening alone.
Weak U.S. employment and retail-sales figures, along with softer inflation data, have also reduced expectations for another interest-rate increase in September.
According to the source, traders cut the probability of a September hike from more than 50% to roughly one in three.
That is another positive for precious metals.
Gold and silver do not pay interest. When yields are rising aggressively, investors have a stronger reason to hold cash or bonds instead. When rate expectations fall, that disadvantage becomes smaller.
At the same time, the dollar weakened sharply following the Treasury announcement.
For gold, that is close to an ideal short-term combination: a softer dollar, less pressure from rates and renewed concern over government debt.
Central banks and exchange-traded funds have also continued adding exposure, according to World Gold Council data cited in the source.
So this isn’t just retail traders chasing a chart.
There is real institutional demand underneath the move.
Silver is moving faster for a reason
Silver has outperformed gold during the August rebound, and we think that makes sense.
Silver often acts like a higher-volatility version of gold. When precious metals sentiment improves, silver can move much faster because its market is smaller and its price tends to react more aggressively.
That works both ways.
Silver’s fall from $121.65 to roughly $54.70 earlier this year is a perfect reminder of what can happen when the trade reverses.
Despite its recent rally, silver remains down more than 7% for the year, while gold is now modestly positive.
That gives silver more room to recover if precious metals continue moving higher, but investors should not confuse greater upside potential with lower risk.
Gold remains the cleaner monetary trade.
Silver is the more aggressive one.
We think the bigger trend is becoming harder to ignore
We would not assume gold and silver move straight up from here.
Both have already rallied sharply in August, and any rebound in the dollar or renewed rise in interest-rate expectations could quickly cool the trade.
But the underlying issue isn’t going away because of one strong or weak economic report.
The U.S. has crossed $40 trillion in national debt, long-term borrowing costs have been testing multi-decade highs and the Treasury is taking steps to support liquidity in the bond market.
At the same time, investors are increasingly questioning how long governments can continue expanding debt without eventually putting pressure on the purchasing power of their currencies.
We think that is the bigger reason precious metals deserve attention.
Gold does not need a financial crisis to work.
It simply needs investors to become a little less confident in paper assets and a little more interested in something governments cannot print.
August is starting to look like that shift is already underway.
Explore More Stories in Commodities
Disclaimer
Wall Street Access is an independent financial publisher. Wall Street Access is not a financial advisor. No company mentioned has compensated Wall Street Access for the preparation, publication or distribution of this article. This content is provided for informational and educational purposes only and is not investment advice or a recommendation to buy, sell or hold any security. Investing involves risk, including the possible loss of principal.
Prices, market capitalizations, financial figures and other market data are based on information available as of the date and time of publication and may change without notice. Information is drawn from public sources believed to be reliable but is not guaranteed to be complete or accurate. Opinions and expectations expressed are our own and may change as new information becomes available.
Readers should conduct their own due diligence and contact a licensed financial professional before making any investment decision. Past performance does not guarantee future results. Any material ownership interest or conflict of interest, where applicable, will be disclosed separately.
