Gold and Bitcoin Rally as Treasury Yields Spike

Gold and bitcoin are moving in tandem as the U.S. government intervenes to suppress long-term bond yields, a dynamic market participants describe as the return of the debasement trade. Since the start of the month, gold has surged more than 15% and bitcoin has jumped more than 25%. These gains have pulled gold into positive territory for the year, with the metal now up around 8% after being down that same amount at its June low. Bitcoin remains off about 10% for the year, a significant improvement from the 33% loss it carried at the end of June.

The pressure on precious metals and crypto stems from rising long-term yields. The interest rate on the 30-year bond recently pushed above 5.3% for the first time in 19 years, up from 4.84% at the start of the year. In response, the Treasury announced it would increase its limit on buying back long bonds from $2 billion to at least $4 billion per operation, signaling that number could rise further. To fund these purchases, the Treasury issues short-term bills, effectively swapping long-term debt for ultra-short-term debt.

Initial efforts to ramp up buybacks did little to lower yields. Officials subsequently floated tapping the roughly $1 trillion Treasury General Account to buy long bonds outright. That move appeared to relieve pressure on the market. The long bond yield now sits at 5.17%, down 6 basis points on Tuesday and about 13 off its recent high.

Investors argue that artificially suppressing long-term rates could lead to easier financial conditions, faster inflation, and downward pressure on the dollar. These concerns have been amplified by the national debt recently crossing $40 trillion. In response, capital has flowed into scarce assets like gold and bitcoin. Last year, both assets hit record highs amid similar fears about U.S. government finances, though they did not move in lockstep throughout that period.

In October of last year, both assets were at records before bitcoin collapsed while gold continued to rally, a divergence that puzzled many investors. Gold later peaked in January before also tumbling. Now, both have rallied off their recent lows, and their correlation has jumped in recent weeks. Measured on daily returns over a rolling 90-day window, the correlation now sits around 0.5, its second-highest level on record. The only time it ran higher was in 2020, when waves of stimulus and ultra-low interest rates sent both assets soaring.

Longer term, gold and bitcoin do not tend to move together. Since 2010, their correlation has been close to zero. Both assets remain below their all-time highs set last year, with gold down about 14% and bitcoin down about 37%. Bitcoin has faced particular headwinds since last October as investor attention shifted toward the AI trade. This month's debasement trade has provided a temporary boost, but whether that momentum will persist remains to be seen.