The debt debasement trade continues – gold and Bitcoin made fresh record highs this week as the US dollar moved lower along with Treasury yields. But why have we seen such a decisive move in these two rather different ‘hard’ assets when USD is still well above even the Dec lows and the 10yr is still north of 4%? This rally for defensive and speculative assets seems to be sending a mixed message about risk appetite.

For Bitcoin, you have the obvious catalyst of the SEC’s approval of a spot ETF, meaning investors can get easy access to it. It also tends to do well when the Nasdaq does well – Bitcoin could be riding on the coattails of the AI boom and is generally done well when liquidity is ample. A halving is approaching, too – usually a positive.

For gold, yields have come down a lot, the dollar has edged off, central banks are buying, China is driving physical demand – but we are far from negative real yields. The 10yr TIPS is still holding around 1.8% – higher for longer has not taken the shine off gold in the slightest. And DXY is only back to where it was in January and remains roughly 3.5% above last year’s lows and 15% above the 2021 nadir. Of course it’s not just about absolute levels, the speed of change is important. But it’s clear that we are long way off the kind of negative rates backdrop that would be considered more supportive of gold prices than a world of positive real rates.

It’s not just inflation hedges. Equity markets also continued to advance into clear blue water – the DAX, Stoxx 600, ASX 200, S&P 500 and Nasdaq all notching new highs this week.

I feel you have to look at this ‘debt debasement’ trade – US and others running ever-higher deficits, racking up more and more debt as they seek to finance more wars, ageing populations and unfettered immigration. And it seems there is little appetite in Washington to reduce government spending or raise revenues – the election this year has broad implications for markets.

Geopolitical uncertainty looms over the trades, too. The relationship between real yields and gold broke down late last year – the inverse correlation weakened as tensions in the Middle East and elsewhere rose, with gold showing less sensitivity to yields and a greater safe haven premium. So maybe bond vigilantes might be quiet but their concerns are showing up elsewhere.

I flagged this from BofA a couple of weeks ago:

“US national debt rising $1tn every 100 days ($32tn to $33tn took 92 days, $33tn to $34tn 106 days, $34tn to $35tn will take 95 days); financing domestic bliss & overseas wars US budget deficit past 4 years = 9.3% of GDP … little wonder “debt debasement” trades closing in on all-time highs”

And I spoke to David Buik this week about whether deficits matter in the latest episode of Overleveraged.

Neil Wilson

Chief Market Analyst at Finalto

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