The 'debasement trade,' a popular macro strategy involving diversification away from the dollar into assets like gold and Bitcoin due to concerns about inflation, fiscal, and monetary excess, started to collapse on January 30. This shift occurred after US President Donald Trump nominated Kevin Warsh to chair the Federal Reserve. On that day, gold plummeted by as much as 13% from its all-time high, marking its steepest decline in over four decades, and Bitcoin subsequently crashed, while the US dollar stabilized after a prolonged period of weakness.
The momentum against the debasement trade intensified last week when Warsh, in his first Federal Reserve policy meeting, emphasized price stability as his primary objective. This unexpected hawkish stance, contrasting with initial assumptions that he might accommodate the White House's preference for lower rates, caused another significant downturn in the debasement trade. Warsh's focus on inflation control also sparked a resurgence in the dollar and boosted inflation-sensitive long-dated Treasuries, to the detriment of gold and cryptocurrencies.
Investors are now fully pricing in two rate hikes by the end of the first quarter of 2027, an increase from the single hike anticipated before last week's decision, with the first hike possibly occurring as early as the next meeting in July. Warsh's commitment to restoring the Fed's inflation-fighting credibility, coupled with his calls for a "regime change" in central bank policy, communication, and balance sheet management, has led to inflation-adjusted yields on 10-year Treasuries reaching 2.28%, their highest levels in over a year.
While the debasement trade was not solely driven by monetary policy, with persistent concerns about government borrowing and debt sustainability (the US budget deficit is currently at nearly 6% of GDP), investors are now prioritizing the prospect of a Fed determined to control inflation. JPMorgan estimates that investor allocations to the debasement trade, primarily in gold and Bitcoin, have reverted to levels last seen in March 2025, before tariff announcements by Trump reignited fears about inflation and policy credibility.
