The Debasement Trade Is Wall Street's Latest Obsession
There’s a new catchphrase to describe the “sell dollar and buy gold” strategy.
Sell government debt, as well as currencies like the dollar, yen and euro. Buy gold, silver and crypto. In a nutshell, that’s the “debasement trade” that’s become the talk of the town.
It’s essentially a bet that the value of sovereign debt, and the currencies they are denominated in, will be eroded over time as governments avoid tackling their massive debt burdens and even add to them. The term debasement is a reference to when rulers such as King Henry VIII and Nero diluted or debased their gold and silver coins with cheaper metals such as copper.
The worry is that central banks will be pressured to hold down interest rates to offset what their governments owe — and in the process fan inflation by continuing to crank out cash.
Proponents can point to plenty of supporting evidence. Last week, Japan’s yen and its bonds were hit by waves of selling as stimulus-friendly Sanae Takaichi took a step toward becoming prime minister. Another round of political turmoil in France over its finances jolted the euro, and a looming budget in the UK is unnerving a gilt market still scarred by the 2022 selloff that swept Prime Minister Liz Truss from power.