What is the debasement trade and why is everyone on Wall Street talking about it?

The term "debasement trade" was coined on fears that the U.S. dollar is losing its purchasing power. Photo by Paul Yeung /Bloomberg

Article content

Investor jitters over a weakening U.S. dollar, rising government debt and central bank monetary policy have fuelled discussion and debate on Wall Street about what JPMorgan Chase & Co. analysts coined “the debasement trade.” Here, the Financial Post explains what it means and how investors can protect their money.

Article content

What is the debasement trade?

Article content

Article content

In a nutshell, the trade is a reaction to the belief that inflation, deepening government deficits and monetary easing by central banks are devaluing traditional fiat currencies and sovereign bonds.

Article content

Article content

Fearing that purchasing power is disintegrating before their eyes, some investors are parking their cash in assets untethered to dilution, such as gold, silver and other precious metals, stocks, real estate and cryptocurrency.

Article content

Article content

“The value of the U.S. dollar in regard to what it’s able to purchase has become steadily worse since the 2008 financial crisis,” said Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel. “As the de-dollarization accelerates, investors bid up hard assets, and those hard assets go up in value.”

Article content

Gold, the safe-haven poster child that investors turn to as a hedge against economic uncertainty, is a prime example. The precious metal’s spot price hit an all-time high of US$4,381 per ounce in October before pulling back. It has risen more than 60 per cent over the last year and is on track for its “strongest performance in a calendar year since 1979,” according to the World Gold Council. Prices for silver, platinum and palladium have also spiked.

Article content

Central banks are a driving force behind gold’s meteoric rise, having beefed up their reserves to over 1,000 tonnes annually over the last three years — from an average of 400 to 500 tonnes annually in the previous decade, according to the council’s 2025 central bank gold reserves survey.

Article content

Article content

“They’re consistently buying because they see what’s going on,” said Paul Wong, market strategist at Sprott Asset Management. “Think of central banks as the ultimate insider for the U.S. dollar and fiat assets. They see the dilutions and they have front row seats to all this.”

Article content

Article content

When did it originate?

Article content

Examples of governments debasing currencies to fund spending date back to the Roman Empire, when Nero set a precedent by gradually reducing the content and purity of gold and silver in coins. King Henry VIII made similar moves between 1544 and 1551, a period known as “the great debasement.”

Article content

Wong said the debasement trade has been happening “forever” and goes through phases. In a report, he noted that the price of gold rose from US$35 per ounce in 1971 to more than US$800 per ounce by 1980 as “loose fiscal and monetary policy, combined with the oil shocks of 1973 and 1979, drove inflation sharply higher, weakened the U.S. dollar and contributed to an extended period of stagflation.”

Article content

That period “established the foundational precedent for modern hard asset investing in environments characterized by currency debasement and inflationary pressure,” he said.