Recently, the price of gold has risen to $4,000 per ounce, the dollar has become worthless, and stocks have hit new highs. Everyone is talking about an investment idea called "currency devaluation trading" - to put it simply, many people believe that the government will use "depreciating money" (i.e., inflation) to reduce heavy debt pressures.
Under this expectation, inflation-resistant "hard assets" such as gold and stocks are particularly popular.
But strangely, the long-term U.S. Treasury bond market, which has always been the most sensitive to inflation, is calm. The key indicator of future inflation expectations remains stable at around 2%, which is the Fed's target level. This shows that the bond market is not worried about severe inflation in the future.
In other words, the market is now divided in "storytelling":
The story of gold is: "I don't trust the future of the dollar." The United States owes too much money and can only rely on money printing and inflation to survive. ” The story told by U.S. bonds is: "I believe that the Fed can control inflation, or the economy will cool down on its own, and prices will not get out of control." ”
Realistic economic data are also contradictory: on the one hand, more people are looking for jobs and the unemployment rate is rising, which gives the Fed a reason to "cut interest rates early" to save the economy; But on the other hand, there are signs of economic growth and prices rising, raising concerns that interest rate cuts will "ignite" inflation again.
"Depreciation trading" is frenzied, and gold is soaring
Over the past year, gold prices have surged 51%, breaking the $4,000 per ounce mark. At the same time, the dollar has become worthless - it has depreciated by more than 10% against other major currencies. The stock market has also continued to rise, hitting new highs.
These phenomena have led more and more investors to discuss an idea called "depreciation trading".
What does that mean? To put it simply, everyone thinks that the government owes too much money and simply lets inflation (that is, rising prices) to "dilute" the debt. The money is worthless, and the debt is relatively less. Under this expectation, "inflation-resistant" assets such as gold and stocks have become more popular.
The idea is not groundless. In reality, inflation can indeed help the government reduce debt pressure, a bit like an "invisible tax". Take Japan as an example: although it has always spent a lot of money and borrowed a lot, because of inflation, its net debt as a percentage of the total economy has dropped from 162% in 2020 to 134% now.
In contrast, the situation in the United States is even worse. Although there is inflation, the government spends more, and the debt burden has not decreased but has increased - from 96% of GDP in 2020 to 98% now. This model of "borrowing money to live" naturally makes people worry about whether they will rely on "printing money to pay off debts" in the future.
In addition to worrying about government finances, there are several important reasons for gold's rise:
Central banks are rushing to buy gold: especially those that do not want to rely too much on the United States are using gold to diversify reserves and reduce risk. Falling interest rates are good for gold: When bank interest rates fall, gold, a non-interest-bearing asset, is more attractive. The more it rises, the more people buy: the more gold rises, the more speculators it attracts, and many people buy when they see a good trend, further pushing up the price.
In short, this wave of gold is not only a risk aversion, but also a bet on currency depreciation and future changes in the economic landscape.
The bond market is "watching coldly": is inflation out of control a false proposition?
However, the hot "inflation panic" sentiment in the gold market has not been recognized by the more professional and larger bond market.
A key data shows this: an important measure of long-term inflation expectations in the future, "five-year inflation expectations starting in five years" (that is, the market's view of inflation in the next 5 to 10 years), has been stable and basically remained at around 2%, which is exactly in line with the Fed's inflation target. This indicator has not moved much, indicating that professional investors are not worried about serious, out-of-control inflation in the future.
In other words, the "veterans" of the bond market do not believe the story behind the surge in gold.
This phenomenon is not limited to the United States. In Europe, despite the fiscal pressure on countries like France, market inflation expectations (reflected by tools such as "inflation swaps") remain stable. This shows that investors still believe that the ECB can control prices and do not believe that the government will rely on "crazy money printing" to get out of the debt crisis.
Therefore, gold is rising, which may be that everyone is "betting on the future"; but the calmness of the bond market reflects "realistic judgment" - it has not yet reached the point where inflation is out of control.
Investors' views are also completely divided
Since it is not because of the same "inflation expectations", why do assets such as stocks and gold rise and some perform differently? In fact, the real reason is that the driving forces behind each market are different, and investors' views are completely divided.
The stock market is rising, probably not because everyone is afraid of inflation, but because they are too excited about artificial intelligence (AI)! Many people believe that AI will bring about a new round of technological revolution and allow the US economy to achieve the ideal state of "fast growth and low inflation", so they desperately buy technology stocks and related assets.
Gold is rising, for more complex reasons. In addition to some people's concerns about future currency depreciation, there are several key factors: central banks are buying a large amount of gold to save up, falling interest rates have made gold more attractive, and the price has been rising, attracting many speculators who "chase the rise and kill the fall" to follow the trend.
In other words, instead of betting on the same thing, everyone is betting on different things.
This situation of "everyone says their own thing" is rooted in a completely different view of the prospects of the US economy. Because the actual data itself contradicts itself:
On the one hand, the job market has begun to weaken, and some people are worried that the economy is about to recession and feel that the Fed should cut interest rates quickly to "save the day". On the other hand, the overall economy is still growing, inflation is also showing signs of rebounding, and another group of people are afraid that interest rate cuts will push prices back up and make inflation return.
Therefore, the key is to distinguish between what is long-term worry and what is immediate reality.
In the long run, if the United States continues to spend so lavishly and its debt rises, sooner or later something will go wrong. At that time, the government may really use the method of "creating inflation" to default. But when will this day come? No one knows, at least not yet.
In the short term, the direction of the market depends on how the Fed takes the next step. If the economy continues to be strong and employment data picks up, the Fed may not cut interest rates or even reconsider raising interest rates. By then, the good days of the stock market, bond market, and gold may be over.
In turn, only when the Fed chooses to "turn a blind eye" and allow the economy to overheat and inflation rise, the so-called "depreciation trade" - that is, the logic of diluting debt and pushing up gold and hard assets by inflation - can really be fully realized.
In short, the market is like a game of chess now, and everyone is waiting for the Fed's next move to decide where to go.
