The so-called 'great debasement trade' is back on as gold sets fresh record, says this strategist

By Jules Rimmer

Fears that central banks will print money to inflate away their debt is the underlying driver behind the gold price but geopolitics are also crucial

Gold is now up 68% for the year

Gold reaching a new record high is evidence the so-called "great debasement trade" is back on, says one strategist.

Robin Brooks, the senior economist at the Brookings Institution and previously chief currency strategist at Goldman Sachs, made his comment as gold surged past $4,400 an ounce.

In a post on Substack, Brooks the upswing is a direct result of the most recent rate reduction from the Federal Reserve and fears of debt monetization, which is central banks buying the bonds the government issues.

Gold has now delivered a 68% return in 2025 and silver (SI00) , subject to many of the same propellants, now up 140% after it too set a fresh record Monday. Rising geopolitical tensions in Venezuela and Ukrainian attacks on Russian ports and shipping have also contributed to gold's safe-haven allure in recent days.

For Brooks, the breakout in gold and precious metals more generally was triggered by Chair Jerome Powell's dovish address at Jackson Hole on Aug. 22 and the 25 basis point easing on Dec. 10. Additional easing from the Fed (FF00) is also being discounted by commodity traders.

He notes, however, that this debasement trade isn't just about precious metals, highlighting that even currencies with low debt levels like the Swedish krona (SEKUSD) and the Swiss franc (CHFUSD) are starting to correlate with gold and silver.

He presents a chart in which he illustrates the performance of G10 currencies against the dollar DXY with gold and silver.

Currencies are betraying the effects of the debasement trade with low-debt sovereigns correlating more closely with rising precious metal prices.

He thinks the krona's strength is attributable to the debasement trade as historically it's been a volatile currency, bereft of safe-haven characteristics. Brooks also makes the point that although the dollar, superficially at least, looks relatively steady and impervious to the debasement trade, its strength against the highly fragile Japanese yen (USDJPY) masks its wider weakness against the broad basket of currencies.

For economist Jeroen Blokland, economist and manager of the Blokland Smart Multi-Asset Fund, the jump in gold owes something to the ongoing carry trade in the Japanese yen, whereby investors take a short position in the yen to fund long positions in higher-risk assets elsewhere. Precious metals are foremost among these options at present.

In a posting on X, Blokland writes that last week's rate hike by the Bank of Japan, taking its policy rate to 0.75% and the highest since 1995, has not ended the carry trade. He argues that inflation is set to remain structurally high and the interest-rate differential between Japan and the U.S. is still sufficiently wide to encourage traders to borrow yen and buy dollars or other high-yielding/ high-risk assets.

Japanese bond yields BX:TMBMKJP-10Y continue to spike higher and have almost doubled this year to 2.08%.

-Jules Rimmer

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