Did the Debasement Trade break Gold?
Gold used to be a good hedge against market pullbacks, but that's no longer true
Something’s happened to gold and it isn’t good. Gold has traditionally been a safe haven asset, which means it’s been a good place to hide when other assets plummet. That hasn’t been true in the past six weeks of war. Gold is down ten percent, which is far more than the S&P 500 that’s down less than one percent. You’re not much of a risk hedge if you sell off harder than the S&P 500 in a bad shock. You’re the opposite. Gold is behaving like a high-beta asset that amplifies sell-offs.
There’s different theories about what’s happened. The first is that emerging market (EM) central banks sold gold holdings during the recent shock, but that’s really only true for Turkey, where holdings fell by 128 tons to mobilize foreign exchange reserves to defend the Lira. Turkey is an outlier in this regard. Its insistence on pegging to the Dollar forces its central bank to sell reserves in bad shocks, a practice most other EMs ditched long ago and for good reason. The second is that the massive rally in gold over the past year - the “debasement trade” - sucked in many new buyers who turn out to be more skittish and prone to bail in bad shocks. This would certainly explain why gold has been trading like a high-beta asset in recent weeks. If this is what’s going on - and I think it is - then it’s just a matter of time until the “debasement” crowd gets washed out and gold returns to being the usual safe haven asset. So safe haven status isn’t gone for ever, it’s just contaminated at the moment.
As the chart above shows, the run-up in gold prices is due to a combination of geopolitics and Fed policy. “Liberation Day” on April 2, 2025, sparked a big rise in gold prices, but it wasn’t until Chair Powell’s Jackson Hole speech on August 22, 2025, that gold prices really took off. That speech proved pivotal because it signaled the start of a Fed easing cycle even though inflation was elevated. It was at this moment that the debasement trade was born. The last Fed cut of 2025 - on December 10 - was another catalyst for gold to go higher. At its peak on January 28, 2026, gold was up almost 100 percent from a year before. It’s clear there were perfectly rational drivers of the rally, but it’s also clear that - by the end - things had gotten totally out of control.
That brings us to the recent sell-off. The chart above shows the correlation of daily changes in the S&P 500 with daily changes in various precious metals and bitcoin. The blue bars are the correlation from January 1, 2011 to August 21, 2025. The red bars are the same thing from August 22, 2025 to February 27, 2026. The orange bars are for the past six weeks of war. What’s clear is that gold has become more pro-cyclical, i.e. it rises when other risk assets rise and it falls when they decline. Its correlation is lower than for other precious metals or bitcoin, but that’s little comfort. For the time being - in my opinion because lots of new people are holding gold - gold is a high-beta asset. That’ll fade over time, but - for the time being - its safe haven status is compromised.
My real problem with these bulletins on the on-off debasement trade is that it misconstrues the notion of ‘safe haven’ and therefore of ‘debasement’. This fuzzy concept, made popular by the business media, reflects an annoying verbal tic, that investors will flee to gold whenever there is '“bad” event— geopolitical conflict or depression or inflation or an asteroid strike on our planet.
We should see it n much narrower terms: gold (and, to a lesser extent, silver) is a hedge against global—repeat global—inflation in an era when central banks have lost credibility. And only in those conditions. Are we in that era? No, not unambiguously. Central Banks (and the Fed matters by far the most because it is the guardian of the purchasing power of the dollar, a de facto global store of value) still have pretty solid reputations everywhere.
The reason we saw the manic run-up in precious metals in 2025 and early 2026 coincided with the period when there was a belief that the Fed’s independence was in jeopardy and by extension that we could be entering a period of financial repression. RB cites instances when Powell hinted unexpectedly at a willingness to be coerced into easing—or at least willing to have his mind changed— expressed with the usual window-dressing of policy-speak. That is the key point.
So why gold? Because gold is still seen across the world and across cultures everywhere as a near-currency. Its importance derives from its historical—indeed mythic—status as currency or backing currency. Does it deserve to be treated as the store of value of last resort? That can be debated, but in the absence of any other and amidst swirling charlatanism around crypto, I would still be keeping my options on gold. (And, by the way, I am not convinced by RB pulling yet another trove of charts of real rates in 1y-3y sector of the US government yield curve that shows them falling rather than rising because there are all model-derived, using interpolations of the breakeven term structure, and are not observables. The short-end of the yield curve is also riddled with Fed’s constant meddling in the repo market and I see little information value there.)
For all these reasons, I am not a big believer in the flows explanation that RB also offers—there could be some validity at the margins that some central banks have sold (or considering selling) gold to buttress their USD reserves in anticipation of further intervention. Or that retail traders are essentially momentum investors. But I wouldn’t fetishize either of those those explanations.
I want to briefly delve into the current crisis : We have rising inflation due to world events and supply interruption . Do we raise interest rates to "fight" inflation and damage the economy or do we do nothing until all blows over or do we resort to easing as a way to help out with the economy in selected sectors . The first choice will lead to a strong dollar and the other choices will lead to debasement and a weaker dollar . Which is best for business and the people ?