Gold Stopped Falling as the Yen Turned. That's No Coincidence

Gold turned weakness into strength as the bond market defended a key price floor and the Japanese yen jumped higher. Scott Bessent, is that you?

• Gold’s attempted breakdown failed the moment bonds steadied at the level the Treasury has been protecting
• What looks like intervention in the yen preceded the jump in metals and stocks, with the dollar faring worst against higher-yielding currencies
• Beneath a solid headline, factory orders, backlogs and hiring are all slowing, while inflation is already drifting the Fed’s way

Have the markets turned a corner?

Long-dated Treasury bonds fell back to the bottom of August’s range and stopped there yet again. The bellwether S&P 500 clung to the top of the range that has contained it since July, avoiding a deeper reversal by a hair, and the tech-heavy Nasdaq 100 managed the same at the level it has now defended three times. Gold erased an intraday loss of almost 1% and snapped higher, posting its biggest gain in two weeks.

The line officials keep defending

Bond market positioning seems especially telling. This is the third time that the 30-year Treasury has tested the range floor established late July amid joint intervention by the US and Japan to strengthen the yen. Scott Bessent’s Treasury enabled Japanese authorities to buy back their currency without selling dollar-denominated assets, signaling their desire to check the slide in government securities. Bonds have been falling since the start of the US-Iran war in late February sparked inflation fears and inspired Fed rate hike speculation.

Two weeks later, the markets tried to poke through that level once again. The very next day, Treasury Secretary Scott Bessent announced the doubling of the size of bond buyback operations from $2 to $4 billion. The sum seems small, but the move is haltingly powerful in its messaging. Once again, officials appeared to be talking to the markets and signaling that yields should not go higher. Today the same level held up for a third time, and this time gold, equities and the dollar marked key reversals in tandem.

What the currency tape gives away

A sudden move in the Japanese yen seemed like a telltale signal once again. The currency spiked hard enough to raise eyebrows. It marked a loss of 0.92% by the end of the session, the largest one-day rise since August 19. Tellingly, that was the same day Bessent made that bond buyback announcement. Official pronouncements did not appear on either side of the Pacific. Still, the markets seemed to intuit that efforts to revive the Japanese currency and keep a lid on long-term US borrowing costs are now a unified front. As the yen rallied, an about-face turn in stocks and gold prices sent both higher while the dollar slipped against all of its major counterparts.

Will the data argue for fewer rate hikes?

From here, US economic data is back in the spotlight as traders continue to wrestle with Fed policy expectations. Before Kevin Warsh upended market pricing with last week’s speech at the Jackson Hole symposium, traders spent most of August clawing back rate hike bets against a backdrop of broadly disappointing American economic releases. Gold and silver pointedly strengthened and the dollar gave up ground.

More soggy US news has already appeared this week. The manufacturing purchasing managers index (PMI) reading from the Institute for Supply Management (ISM) held up at the headline, yet the internals showed order backlogs growing far more slowly, new orders slowing sharply, inventories stalling, delivery times stretching, and hiring cooling.

The policy outlook has remained steadfastly hawkish so far. Fed Funds futures put the probability of a hike this month near 65% and see an increase by October as all but certain. That may sit awkwardly with ISM service-sector PMI data as well as August’s jobs report if those results land soft as well, making a hawkish consensus increasingly hard to defend. A rethink would probably look a lot like the price action on display amid the yen’s mysterious spike higher: a tailwind for precious metals and trouble for the greenback.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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