What we know about the debasement trade

Fear that unsustainable debt levels will be inflated away is driving the debasement trade

The debasement trade is new. It began after the chaotic rollout of reciprocal tariffs in early April, but really only got going in full force after Chair Powell’s dovish speech at Jackson Hole on August 22. In today’s post, I summarize what I “think” we know about this trade, where the emphasis is on “think.” The debasement trade is completely new and it’d be foolish to claim we know what it is. We don’t. As market move and react to various catalysts, we’re learning in real time what this thing is.

Here’s what I think we know. First, at its most basic level, this trade is about growing fear in markets that fiscal policy in many advanced economies is on an unsustainable path and that high debt levels will be inflated away. This is why yields on longer-term government bonds have been rising so rapidly in many places. Markets are demanding higher risk premia as a hedge against debt monetization. Second, higher yields are an imperfect hedge, because governments can do lots of things to keep yields artificially low, ranging from central bank bond buying and yield caps to regulatory changes that force banks to hold more bonds (financial repression). As a result, markets are hunting for safe haven assets, which is what the crazy rally in precious metals is about. There’s no guarantee precious metals will remain the main beneficiary of this trade. Markets are constantly testing if other things might be good safe havens. Low-debt countries like Sweden and Switzerland are definitely in vogue. Third, appetite for safe havens is much stronger than I would have thought. The end of the US government shutdown has seen a resumption of the precious metals rally, which is counterintuitive. After all, the end of the shutdown reduces recession odds and pushes up real rates, which are things that should weaken demand for gold and silver. Markets are treating good news as bad news. That’s worrying.

The chart above is my debasement trade monitor. It shows the behavior of key assets since August 1. I’ve also highlighted three key catalysts: (i) August 21, the day before Chair Powell’s dovish speech at Jackson Hole; (ii) September 17, which is when the Fed resumed its easing cycle with a 25 basis point cut; and (iii) October 16, which is towards the end of the IMF/WB annual meetings week, which - as I flagged at the time - was a catalyst for the precious metals bubble to burst.

The chart helps illustrate several things. First, markets are picky about what they see as a safe haven asset. Bitcoin (orange) obviously doesn’t fall into that category. It’s too volatile to be a store of value. Second, the Dollar (blue) is completely stable against its peers, so the debasement trade isn’t about a flight out of the Dollar. It’s about a much broader loss of confidence in fiat currencies. Third, the search for safe havens is much stronger than I expected. The end of the US government shutdown has taken gold (black) and silver (purple) back to near their October highs. That’s worrying. Policy makers need to get fiscal policy under control. Markets are running out of patience.

It’s not straightforward to map the Fed into any of this. Clearly Jackson Hole was a catalyst for precious metals, but market pricing for Fed cuts doesn’t obviously line up with the debasement trade. The chart above shows what markets price cumulatively for Fed cuts through the end of this year and through end-2026. I’ve added the two 25 basis point cuts that happened on September 17 and October 29 back in to show how overall sentiment on the Fed has evolved. Yesterday’s hawkish commentary by Boston Fed President Collins caused a small pullback in pricing for 2025 (blue) and maybe drove the fall in precious metals. But pricing for cuts through end-2026 (black) is little changed, as markets increasingly look beyond Powell.

Indeed, as the chart above shows, safe haven currencies like the Swedish Krona (red), Norwegian Krone (orange) and the Swiss Franc (black) kept rallying against the Dollar yesterday, so we’re getting all kinds of mixed signals that - I suspect - will be resolved in the direction that precious metals will resume their rally.

There’s a lot we don’t know, but my overriding impression from the last few weeks is that the underlying drivers of the debasement trade are much stronger than I had anticipated. That’s a sea change for debt and global markets.