The increasing concerns about the U.S. dollar’s depreciation have become a significant trend among traders this year. In response, many have sought refuge in assets like gold and bitcoin, especially notable during the ongoing partial government shutdown.
This “debasement trade,” which gained traction as the November 2024 presidential election approached, has seen heightened interest since the shutdown commenced this past Wednesday.
On Friday, gold for December delivery GCZ25 GC00 reached a record high of $3,908.90 per ounce on Comex, marking the 41st time this year the most active contract has set a record. Additionally, bitcoin BTCUSD surged past $125,000 briefly on Sunday, setting an all-time high. The ICE U.S. Dollar Index DXY, which gauges the dollar against a basket of six currencies, fell 0.1% on Friday and is down approximately 10% year-to-date.
The debasement trade—characterized by a shift away from fiat currencies like the dollar—could gain further momentum whether the shutdown remains short or extends beyond a week. This is due to a range of ongoing factors, including uncertainty surrounding long-term inflation, U.S. fiscal policy developments, worries about Federal Reserve independence, and the likelihood of sustained high deficits in significant government sectors.
Read: How the government shutdown leaves investors without data. Here’s how they adapt.
“The debasement trade has evidenced robust momentum this year, with gold and bitcoin yielding significant returns,” noted Matt Stucky, the Milwaukee-based chief portfolio manager of equities at Northwestern Mutual Wealth Management Co. “Declining real interest rates and the beginning of interest-rate cuts, amidst ongoing elevated inflation, have propelled these moves upward.”
Historical data indicates that the debasement trade does not consistently intensify during government shutdowns. Furthermore, the dollar remains stronger compared to its levels during the previous U.S. government shutdown that lasted 35 days between 2018-19, occurring during the first Trump administration.
