⚖️ Is the Dollar Losing Power?

Dollar Weakness Fuels the “Debasement Trade” as Gold and Bitcoin Surge

The “debasement trade” — a strategy embraced by investors to hedge against a weakening U.S. dollar — is accelerating as market uncertainty deepens during the federal government’s partial shutdown.

The trade, which gained traction among retail investors ahead of the November 2024 presidential election, centers on diversifying away from fiat currencies like the dollar. With concerns over fiscal stability, inflation, and Federal Reserve independence, assets such as gold and bitcoin have become top picks for investors seeking safety.

On Friday, gold for December delivery closed at a record $3,908.90 per ounce, marking its 41st record-high settlement this year. Over the weekend, bitcoin briefly surpassed $125,000, hitting a new all-time high. Meanwhile, the ICE U.S. Dollar Index (DXY) fell 0.1% on Friday and is down about 10% year-to-date, underscoring the greenback’s weakness.

“The debasement trade has shown remarkable strength this year, with both gold and bitcoin delivering strong returns,” said Matt Stucky, chief portfolio manager at Northwestern Mutual Wealth Management. “Declining real interest rates and renewed rate cuts, even with elevated inflation, have helped drive this momentum.”

Although past government shutdowns haven’t always triggered a rush into hard assets, the current environment of persistent deficits, fiscal dysfunction, and inflation uncertainty has made the narrative more compelling.

According to J.P. Morgan strategists, the trend accelerated in the third quarter as retail investors increased their exposure to both gold and bitcoin ETFs. Institutional investors are now following suit, adding further momentum to the trade.

At Citi, analyst Alex Saunders described bitcoin as “digital gold,” projecting a 12-month target of $181,000, citing steady inflows from investors.

Still, not everyone is equally bullish on crypto. Komal Sri-Kumar, president of Sri-Kumar Global Strategies, prefers gold as a longer-term store of value, arguing that the metal’s centuries-old track record makes it more reliable.

“You can’t hide in fiat currencies when all are being debased,” he said. “That makes gold particularly attractive. I expect it to climb above $4,000 before year-end.”

Veteran fund manager Jeff Muhlenkamp of Muhlenkamp & Co. echoed those concerns, saying the U.S. faces deep structural issues tied to runaway deficits. His firm has increased its gold exposure to 18%, citing the growing gap between spending and GDP.

“We’re running a deficit equal to 6% of GDP,” Muhlenkamp said. “That’s not sustainable. The problem is getting worse, not better.”

As fiscal pressures mount and confidence in fiat currencies wanes, the debasement trade — once a niche hedge — is fast becoming one of 2025’s defining investment themes.