In January, gold was beyond reach. Central banks were buying, investors anticipated US Federal Reserve rate cuts, and the metal briefly touched $5,600 an ounce. Then came the reversal.
The West Asia oil shock did not weaken the dollar, as gold bulls expected. It strengthened it. Higher energy prices revived inflation fears, lifted Treasury yields and created a scramble for dollars. Fed chair Kevin Warsh dashed hopes of imminent easing; three policymakers even dissented in favour of a rate increase. A crowded consensus trade became a rush for the exits. Gold fell more than 25%, slipping below $4,100.
Federal debt has crossed $40 trillion, annual interest costs exceed defence spending, and roughly $9 trillion of marketable Treasury debt matures in 2026. America is caught in a fiscal-monetary zugzwang: keep rates high and refinancing becomes increasingly painful; cut rates and risk reigniting inflation, weakening the dollar and undermining confidence in Treasury debt. It is a purchasing-power story, and that is gold’s territory.
The problem is not only the quantity of US debt but the disappearance of traditional, price-insensitive buyers. Foreign private purchases of Treasuries have fallen sharply, foreign official institutions have been selling, and the Fed has already reduced its holdings through quantitative tightening. China’s holdings are at their lowest since 2008, while Japan has also reduced its exposure. America can still find buyers—but increasingly only by offering higher yields, shortening maturities or relying more heavily on domestic balance sheets.
Japan supplies the second warning. For years, near-zero Japanese rates made the yen the world’s cheapest funding currency. Investors borrowed yen to buy Treasuries, corporate credit, emerging-market bonds and equities, quietly inflating asset prices worldwide. Yield-curve control sustained the liquidity machine by capping Japanese government bond yields.
Since the policy ended in 2024, Japanese yields have risen, and the yen has become less reliable as a funding currency. When the cost of yen rises—or the currency strengthens—the carry trade must shrink.
It was Washington’s first yen-buying operation since 1998. Supporting the yen reduced the immediate pressure on Japan to sell Treasuries, but it required official action against excessive dollar strength. The Treasury’s subsequent decision to double long-bond buybacks reinforced the message: policymakers are increasingly sensitive to yields that the fiscal system cannot comfortably bear.
No authority will announce a policy of dollar debasement. It happens quietly—through negative real rates, tolerance of inflation, bond-market support, currency intervention and a preference for nominal growth over fiscal austerity.
Each measure can be defended individually. Together, they shift part of America’s debt burden from the government’s balance sheet to the purchasing power of savers.
Markets appear to understand this. In Vallum’s post-intervention comparison, gold rose 10.2%, outperforming emerging-market equities, commodities and the S&P 500, while long-dated Treasuries declined. Gold was trading not merely as a commodity, but as an alternative to policy-managed money.
The buyer base strengthens the case. World Gold Council data show central banks and other official institutions bought 288.9 tonnes in the second quarter—62% more than a year earlier—even as gold ETFs recorded net outflows and jewellery demand weakened. Total supply was virtually unchanged at 1,269 tonnes; mine production increased only 2%. Sovereign demand can accelerate far more quickly than mining, which can take more than a decade to develop.
Unlike a bond, gold has no issuer; unlike a currency, its supply cannot be expanded by a policy committee confronting an election or refinancing calendar. The upcoming BRICS meeting holds the key to an alternative currency launch, long talked about.
Gold should therefore hold a permanent place in every diversified portfolio. A strategic allocation of 5–10%, with 7.5% as a reasonable benchmark, is appropriate. Equity-heavy investors, those exposed to rupee depreciation or those prioritising capital preservation, may move closer to 10%. New investors should build exposure gradually through low-cost, physically backed gold ETFs or regulated gold funds, then rebalance annually. Gold is not a replacement for productive assets; it is insurance alongside them.
The forces beneath gold—record US debt, weakening Treasury demand, a changing the yen regime, official-sector buying and inelastic supply—survived the sell-off. The sell-off killed the crowded trade, but may have prepared gold for its resurrection. If the dollar is quietly debased, gold need not become intrinsically more valuable; it simply needs to be repriced in more dollars. Investors have the choice of holding gold through ETFs or in physical formats.
Manish Bhandari, CEO and Portfolio Manager, Vallum Capital Advisors. Views are personal