Despite gold prices soaring to $4,000, a declining US dollar, and stocks hitting new highs, with widespread market discussions about "debasement trades," the US bond market—which should be most sensitive to inflation risks—remains unusually calm. Its core long-term inflation expectation indicators remain steadily anchored near the Federal Reserve's 2% target.

The so-called "debasement trade" is based on the core logic that investors are betting governments will create inflation to "dilute" their increasingly massive debt burdens. Under this expectation, hard assets like stocks and gold that can hedge against inflation risks naturally gain favor.

Analysis suggests that gold and US Treasuries are currently telling two completely opposite grand narratives. Gold's logic represents a "vote of no confidence" in future monetary credibility: it bets that America's massive debt can ultimately only be diluted through inflation. Treasury bonds' logic is precisely the opposite, representing a "vote of confidence" in policy credibility: their stable long-term inflation expectations show that markets believe the Federal Reserve will successfully defend its inflation target, or that economic slowdown will naturally suppress prices.

From a data perspective, current US macroeconomic data is also full of contradictions: employment slowdown provides justification for the Fed's "preemptive rate cuts," while strong growth and signs of rising inflation make others worry that rate cuts will add fuel to future inflation fires.

Therefore, the current market's core battle lies in betting which economic signal will ultimately dominate Federal Reserve decisions—choosing to cut rates to address potential recession, or being forced to tighten policy to suppress inflation? This is not only the point of divergence between gold's and Treasury bonds' pricing logic, but will also determine the ultimate direction of major asset classes in the short term.

"Debasement Trade" Frenzy, Gold Soars

Over the past 12 months, gold prices have surged 51%, breaking through the $4,000 barrier. During the same period, the US dollar against a basket of major currencies has declined by more than 10%. Meanwhile, as an asset that can hedge against inflation risks, the stock market has also repeatedly hit new highs.

This series of market performances has led more and more investors to discuss "debasement trades."

The so-called "debasement trade" is based on the core logic that investors are betting governments will create inflation to "dilute" their increasingly massive debt burdens. Under this expectation, hard assets like stocks and gold that can hedge against inflation risks naturally gain favor.

The realistic foundation for this logic is that under the current backdrop of high government debt among major global economies, inflation as a form of hidden taxation can indeed effectively reduce debt. Take Japan as an example: through inflation, the country successfully reduced its net debt-to-GDP ratio from a 2020 peak of 162% to 134% this year, while continuing deficit spending.

In contrast, although the US has also experienced inflation, due to larger government spending, its net debt-to-GDP ratio has actually risen from 96% in 2020 to 98% this year. This situation of borrowing from the future naturally raises market concerns about future money printing to solve debt problems.

Beyond concerns about fiscal prospects, several powerful forces drive gold's rise: First, global central bank reserve managers, especially those hoping to reduce dependence on the "unpredictable United States," are continuously increasing gold reserves to achieve asset diversification. Second, in a declining interest rate environment, gold's attractiveness as a non-yielding asset naturally increases. Finally, sustained price increases themselves have attracted numerous momentum buyers chasing trends.

Bond Market "Looking On Coldly": Is Runaway Inflation a False Proposition?

However, the hot narrative in the gold market seems not to have gained recognition in the more professional and much larger bond market.

Data shows that key indicators measuring market expectations for future long-term inflation—the "five-year, five-year forward breakeven inflation rate"—have remained basically stable and close to the Federal Reserve's 2% target level, showing no volatility due to gold's surge.

This indicates that professional bond investors do not believe runaway malicious inflation will occur in the future.

Not only in the United States, but European inflation swap markets also show investor confidence in the European Central Bank's ability to control inflation. Even with France facing fiscal difficulties, markets have not priced in a scenario requiring large-scale inflation for rescue.

Behind Market Division

If not due to common inflation expectations, what has caused the synchronized or divergent movements in different asset prices?

A more reasonable explanation is that different markets are being driven by different logics, with the entire investment community's views in a state of division.

The stock market's rise may stem more from fervent bets on the artificial intelligence (AI) technology revolution and optimistic sentiment about the US economy achieving the ideal combination of "strong growth, moderate inflation" driven by AI investment, rather than simple inflation hedging.

Gold's rise logic is more complex. As mentioned earlier, beyond some investors' risk hedging considerations, it's also driven by factors including central bank purchases, low interest rates, and momentum buyers.

Analysis suggests this market division is rooted in fundamental disagreements about US economic prospects. Current macroeconomic data itself is full of contradictions: on one hand, signs of labor market slowdown make some worry about economic prospects and consider the Federal Reserve's preemptive rate cuts reasonable. On the other hand, economic growth data remains strong, and inflation shows signs of rising, making others worry that rate cuts will add fuel to future inflation fires.

Fundamentally, investors need to clearly distinguish between long-term risks and short-term realities.

From a long-term perspective, if the United States doesn't change its fiscal trajectory, a debt-triggered "bond market showdown" will eventually come, and inflation will likely become politicians' easiest choice, but that day seems still far away.

In the short term, the market's fate rests in the Federal Reserve's hands. If economic growth continues and employment slowdown proves to be a false alarm, the Federal Reserve will have to abandon rate cut expectations and even return to a rate hiking path. At that point, the party for stocks, bonds, and gold will all come to an abrupt end. Only when the Federal Reserve chooses or is forced to tolerate economic overheating and allow inflation flames to burn will the logic of "debasement trades" be truly and fully realized.