Gold gains $21 in 3 days on T-bond selloff

Gold enjoyed a nice lift late last week as the yellow metal cruised to $1,337.40 at the close of trading Friday in New York.

Spot gold gained $21.40 between Wednesday and Friday, clearly benefiting from the fallout of a dramatic selloff of US government debt. February gold futures rose 0.29% to $1,338.80.

According to Bloomberg, Chinese government officials have recommended slowing or halting purchases of US Treasuries, of which they hold the most in the world, at $3.1 trillion. 

Whether or not the Chinese follow through on slowing or stopping Treasury purchases, the damage was done to the bond markets, with the 10-year US Treasury hitting the highest level in 10 months at 2.59%, last Tuesday.

The threat to withdraw bond purchases may be being used an an economic lever against increased US protectionism and Trump’s rhetoric over unfair trade practices he says have led to China’s $275 billion trade surplus with the US.

However a report by Bullion Vault on Thursday was calling "fake news" on the rumour. "In our opinion, the news may quote the wrong source of information, or it may be false news," said China's State Administration of Foreign Exchange. Bullion Vault quoted another source, Brad Setser, a senior fellow at the Council on Foreign Relations and former assistant secretary for international economic analysis in the US Treasury, as saying that China simply has no need to buy any more US Treasuries because it has met its Treasury portfolio target of 40%.

Whether or not the Chinese follow through on slowing or stopping Treasury purchases, the damage was done to the bond markets, with the 10-year US Treasury hitting the highest level in 10 months at 2.59%, last Tuesday. (bond prices and yields are inversely related). The sales coincided with investor fears that central banks are slowing their purchases of sovereign debt instruments after years of dovish monetary policy designed to stimulate flagging economies.

For instance the Bank of Japan, which last Tuesday trimmed its purchases of Japanese bonds by about $20 billion. Japan has been a poster child for quantitative easing even as the US Federal Reserve and the European Central Bank cut back on asset purchases (the US ended QE in September).

As bond yields rose, the US dollar also fell, which helped gold prices too. Last Wednesday the dollar slumped to six-week low against the Japanese yen and fell against a basket of other currencies. Gold prices and the US dollar index move in opposite directions.