Dollar-Yen Dilemma Sparks Structural Bull Case for Gold
The recent surge in gold prices can be attributed to the dollar-yen dilemma, which has created a structural bull case for gold.
Nagham Hassan, Market Analyst at etoro, points out that the price movement of gold was not driven by familiar news but rather a currency rescue. The yen had fallen to its weakest level since 1986, with a single session of purchases by Japan's finance ministry amounting to an estimated $53 billion.
The US Treasury Secretary, Scott Bessent, was caught on camera noting 'To Do, Buy Japanese Yen (JPY) $5-10 bil.' Washington then bought yen through the New York Fed, paying in euros to avoid selling US Treasuries held by Japan. This move was deliberate, as funding a long yen defence would have meant selling bonds, which could have pushed bond prices down and yields up.
The rate gap between the US and Japan remains significant, with the 10-year US Treasury yield at 4.736 percent compared to Japan's 1 percent. Closing this gap means unwinding trades built on cheap yen borrowing, which would require selling US bonds into a market already carrying high yields. Alternatively, leaving it open means the yen continues to slide, and the response remains what it was in July, borrowing against bonds instead of correcting the rate that caused the problem.