Gold prices have jumped more than 60% this year, rising above $4,300 per ounce. This significant increase has made headlines and left many investors wondering if this time is different from previous gold price surges.
Some people call this the “debasement trade.” This term refers to the idea that governments might weaken their currencies by spending more than they collect in taxes and by keeping interest rates low. These factors, combined with a weaker U.S. dollar, have led some investors to prefer assets like gold. Gold is often seen as something that holds its value over time, especially when stock prices become more unpredictable.
While concerns about government spending and debt are real, history shows us that predicting gold prices is very difficult. Additionally, many factors beyond currency values and interest rates are affecting the broader market. For investors thinking long-term, the key question isn’t whether to choose stocks and bonds or gold. Instead, it’s about figuring out how much of each to include in a balanced investment mix.
Most importantly, investors should understand the difference between trying to profit from short-term price changes and planning for long-term financial needs like generating income and building wealth over time. This distinction becomes especially important when an asset has already seen a large price increase.
What currency debasement means and its history
Currency debasement is an old concept that dates back thousands of years, but it comes up in financial discussions every few years. Originally, “debasement” meant that governments reduced the amount of precious metals in their coins. This allowed them to make more coins from the same amount of metal, but it also meant each coin was worth less.
Today, most currencies are called “fiat currencies.” This means their value comes from trust in the governments that issue them, not from being backed by gold or other precious metals. Modern debasement concerns focus on whether governments will allow higher inflation (rising prices) and a weaker currency. This would make it easier for governments to manage their debts, but it would also reduce the purchasing power of people’s money.
These concerns relate to ideas that became popular after the 2008 financial crisis. Economists Reinhart and Rogoff described something called “financial repression.” This refers to policies that keep interest rates artificially low to reduce what the government pays on its debt. This hurts savers because the value of their cash decreases if interest rates don’t keep up with inflation. As government debt continues to grow, some investors worry about these policies and look for assets that can maintain their value.
However, the evidence that this is happening right now is mixed. First, inflation rates remain somewhat elevated but are not extreme. The Consumer Price Index, the Personal Consumption Expenditures Index, and the Producer Price Index are all at 3% or lower. Second, the bond market isn’t expecting high inflation. The 10-year Treasury yield has recently fallen to 4% or less, and Treasury Inflation-Protected Securities suggest expected inflation of only 2.3%.
Two other factors are worth noting. First, central banks worldwide have been purchasing gold to strengthen their reserves. This has increased due to geopolitical uncertainty and the weakening dollar. Second, while the dollar’s value has dropped about 10% this year, it remains relatively strong compared to the past twenty years. From a long-term view, the dollar is still quite robust by historical standards.
Gold price movements are hard to forecast
As an investment whose value can change dramatically, gold often attracts investor attention. Over recent decades, gold has seen several dramatic price increases with varying outcomes. In the late 1970s, gold prices surged as investors worried about high inflation combined with slow economic growth. Its price peaked above $800 in 1980, but it didn’t reach that level again until 2007.
A similar pattern happened after the 2008 financial crisis when central banks added massive amounts of money to the financial system. Many investors reasonably worried about very high inflation and a collapsing dollar, but neither happened. Gold prices doubled between 2009 and 2011, reaching about $1,900 per ounce, before falling back toward $1,000 over the following years. This decline occurred even though the Federal Reserve didn’t begin reducing its stimulus programs until 2013 or start raising interest rates until 2015.
The chart shows gold’s performance compared to the S&P 500 stock index since the market peak in 2007. While gold has had periods of strong performance that help diversify portfolios, the S&P 500 has still delivered better returns over the entire period. For investors focused on daily market movements, this fact may be surprising. Again, this highlights the importance of viewing all investments as parts of an overall portfolio strategy.
Many different investments have performed well this year
The current gold rally, which started in 2024, has occurred alongside strong performance in many other investments. These include artificial intelligence stocks like the Magnificent 7, international stocks, bonds, and cryptocurrencies. The chart shows that many different types of investments have contributed to portfolio returns this year. While gold has certainly done well, there will always be individual stocks and other assets that perform strongly in any given year.
For many investors, gold serves as part of a broader commodities investment, possibly grouped with other alternative investments. The Bloomberg Commodity Index, for example, started the year with 14.3% allocated to gold. Combined with other commodities like silver, industrial metals, energy, and grains, this index has gained 10.6% so far this year.
There are other reasons to hold many different types of investments that align with long-term financial goals. One important consideration is that gold doesn’t generate income, unlike bonds or stocks that pay dividends. A portfolio that places too much emphasis on gold gives up the longer-term growth potential of stocks and the income provided by bonds.
The bottom line? Some investors are worried about the weakening value of the dollar, especially as gold prices continue to rise. Investors should think of gold as one part of a broader portfolio that matches their long-term financial goals.
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