What Is the 'Debasement Trade' And Why Should You Be Paying Attention to It?

• Enthusiasm for the "debasement trade" appears to be accelerating as retail investors increasingly question the status quo.

• Gold prices reached an all-time high of over $4,000 on Tuesday as it and other assets are viewed as safe havens.

Fear of impending catastrophe is putting the shine on gold and things like it.

Investors have been piling into what is sometimes called the "debasement trade," plowing into assets viewed as hedges against what they worry about most—including persistently high government debt and central bank independence—and panning what was once considered the safest place to park: the U.S. dollar.

That's helped push gold, as well as digital gold—also known as bitcoin (BTCUSD)—to all-time highs. The price of the precious metal surpassed $4,000 per troy ounce on Tuesday, while the world's largest digital currency topped $126,000 on Monday. The SPDR Gold ETF (GLD) and, to a lesser degree, the iShares Bitcoin Trust ETF (IBIT) have been climbing all year; the U.S. dollar index (DXY) has been in decline over the same period.

Gold’s record-breaking rally underscores growing concerns about government debt, inflation, and the stability of the U.S. dollar. The surge in gold and bitcoin shows investors shifting toward hard assets as hedges against a weakening dollar and long-term financial instability.

Investors are hedging their bets against dollar dominance in a "really concerning" development, pushing up the price of gold and crypto assets, according to Citadel's Ken Griffin. "We're seeing substantial asset inflation away from the dollar as people are looking for ways to effectively de-dollarize or de-risk their portfolios vis-a-vis U.S. sovereign risk," he recently told Bloomberg.

JPMorgan's Nikolaos Panigirtzoglou in a report last week observed year-to-date net inflows into gold ETFs and mutual funds that were much larger than to those for gold mining and refining companies. That suggests to Panigirtzoglou that retail investors, in particular, were leaning into the debasement trade "as a hedge against a catastrophic scenario," because investing in gold miners would be less effective as one.

Meanwhile, private investors—individuals as well as family offices—have started to put a premium on "privacy and tangibility" of gold since the pandemic and have been buying gold bars and coins rather than ETFs. That has made the link between gold ETF flows and gold prices less important, and the link between central bank flows and gold more so, according to JPMorgan.