The 2025 Gold Rush - "Debasement Trade" or FOMO?

In recent market activity, gold has experienced a significant "gold rush," with prices surging over 60% year-to-date and reaching a new all-time high of nearly $4,400 per ounce. This momentum has extended to silver, which has similarly hit record highs. Globally, this has sparked a retail mania, with consumers in Australia and Vietnam lining up at dealers and search interest for "buy gold" reaching peak levels. Even political figures like Donald Trump have engaged with the trend, though some of the gold seen in his surroundings is reportedly plastic. Beyond the immediate excitement, a more serious narrative is driving this price action: the "debasement trade." This theory suggests that ballooning deficits, political instability, and heavy central bank buying indicate that the world is preparing for the collapse or replacement of the US dollar. To understand if this is a temporary fad or a shift toward a "new golden age," it is necessary to examine gold's role as an asset class and the specific factors fueling its current rise. Gold is a unique investment because it produces no cash flow or yield. While it has industrial uses, 44% of its demand is financial, and central banks hold about one-fifth of all gold ever mined. Investors typically buy gold as a "safe haven" asset intended to retain value during turmoil. Historically, gold prices have breached major psychological levels during crises, such as the $1,000 mark during the 2008 financial crisis and $2,000 during the COVID-19 pandemic. Because its supply only grows by about 2% annually, it is also viewed as an inflation hedge against fiat currencies. Much of its value is derived from historical inertia; it has been coveted for thousands of years, and even after the abandonment of the gold standard in the 1970s, it remains a pillar of central bank reserves. The current rally is fueled by several layers of uncertainty. On the economic front, Donald Trump’s tariff policies have disrupted global supply chains, with recent threats of a 100% tariff on Chinese goods causing further anxiety. While AI stocks have bolstered the economy, many analysts warn of a looming recession. Goldman Sachs and JP Morgan have placed recession probabilities at 20% and 40%, respectively, while one UBS analyst suggested a 93% probability. Some investors are even using gold to hedge against a potential "AI bubble" correction. Additionally, massive government debt loads and high interest burdens create fears that a recession could lead to a fiscal crisis. Political instability is another major driver. In the United States, concerns have been raised regarding the integrity of the US dollar and the independence of the Federal Reserve. Donald Trump has publicly pressured Fed Chair Jerome Powell and attempted to replace board members with more compliant figures. Furthermore, the US recently experienced its second-longest government shutdown in history due to spending disagreements, which helped push gold past the $4,000 mark. Internationally, France has seen four prime ministers in two years, and Japan’s high debt levels combined with stimulus-friendly leadership have raised concerns about future deficits and bond yields. Central banks have also played a pivotal role. For the first time since 1996, the value of gold in central bank reserves exceeds that of US Treasuries. These institutions have been buying gold at their fastest pace since the 1950s, with over 1,000 tons purchased annually for the last three years. This institutional activity has encouraged retail investors to enter the market, primarily through gold ETFs, which saw more than $60 billion in inflows in the first nine months of 2025. However, the "debasement trade" narrative—the idea that the dollar is being systematically eroded—requires critical examination. While the dollar has declined 10% this year, it remains flat compared to three years ago and has been relatively stable since April, even as gold continued to surge. When gold is priced in other commodities like oil, it still shows a dramatic increase, suggesting the rally isn't just a reflection of dollar weakness. Furthermore, inflation expectations haven't spiked, and US Treasury yields don't yet reflect a mass abandonment of the dollar. It is also important to note that the "shift" from Treasuries to gold in reserves is largely due to the surge in gold’s price rather than a massive change in the quantity held. The US dollar remains the dominant reserve asset, with $7 trillion held globally compared to $5 trillion in gold. Additionally, the aggressive gold buying is concentrated in a few emerging markets—such as Poland, Kazakhstan, Turkey, China, India, and Russia—rather than a global consensus among major powers. Most central banks actually have no plans to increase their gold allocations, as gold is costly to store, produces no income, and is less liquid than Treasuries for policy transactions. Ultimately, gold’s reputation as a "safe" store of value is not a historical guarantee. It experienced a 20-year price decline starting in the 1980s, and scarcity alone does not dictate value—as seen with palladium, which is rarer than gold but trades at a fraction of the price. With gold dropping 5% from its recent peak, the risk of a correction remains high. Future price movements will depend on unpredictable demand trends, trade deals, and interest rates. While some use gold as a hedge against catastrophic "tail risks," the current narrative of a total dollar collapse may be premature.