Cracks emerge in the post-pandemic debasement trade
For much of the past few years, the so-called debasement trade has been one of the dominant themes in markets. At its core, it is a bet that governments and central banks will keep eroding the value of fiat currencies through large fiscal deficits, elevated debt levels and loose monetary policy.
Investors positioned for this outcome by loading up on assets viewed as stores of value or hedges against currency weakness, most notably gold, silver and crypto. The trade really emerged after the Covid-19 pandemic, when aggressive fiscal stimulus and ultra-loose monetary policy worldwide stoked fears of higher inflation and currency debasement.
The Federal Reserve’s (Fed) recent rate-cutting cycle added further fuel. It began in September 2024 with a larger-than-expected 50 basis point (bp) cut. Including that move, the Fed delivered a total of 175 bp of easing, bringing the federal funds rate down to the current 3.50% – 3.75% range. President Trump’s vocal calls for deeper cuts and personal attacks on then-Fed Chair Jerome Powell, while not directly shaping those decisions, did raise legitimate questions about the Fed’s independence.
Trump’s One Big Beautiful Bill (OBBB), which passed exactly a year ago on 4 July reinforced the theme further. Widely seen as expansionary, it was expected to push the federal deficit meaningfully higher in the years ahead. Then came the Jackson Hole Symposium in August 2025, where Fed Chair Powell struck a relatively dovish tone, stressing the importance of a soft landing and remaining data-dependent on inflation. Markets interpreted the Fed Chair’s remarks as a sign that the Fed was in no hurry to tighten and would likely keep easing if the data permitted.
Hawkish Fed shift and USD strength challenge narrative
Two months later, cracks emerged with a flash crash in crypto driven by overextended positioning and a lack of fresh positive crypto news. Gold and silver followed suit in late January, while the US dollar (USD), as measured by the US dollar index (DXY), put in a bottom at the same time.
The catalyst for those moves in January was President Trump’s nomination of Kevin Warsh to succeed Powell as Fed Chair. The move, later confirmed, was widely expected to restore a degree of credibility and help address lingering uncertainty around the Fed’s independence.
Those initial thoughts around Warsh were confirmed after a hawkish shift at this month’s Federal Open Market Committee (FOMC) meeting. The statement dropped previous easing language, and in his press conference Warsh was emphatic, repeating ‘price stability’ multiple times and making clear he wants markets to react to data rather than front-run the Fed. The US interest rate market has responded by pricing in a full Fed rate hike by October, pivoting from the 50 bp of rate cuts expected in late February.
Stepping back, gold, silver and Bitcoin have been among the clearest casualties of the unwind in the debasement trade. After hitting a record high of $5602, gold is now trading below $4000, some 29% below its peak. Bitcoin is currently trading around $60,000, some 53% below its $126,672 record high, while silver sits at $57.24, also 53% below its $121.67 peak.
Looking ahead, in a world without Fed forward guidance, primary data prints, especially payrolls and inflation figures, will carry even greater weight in shaping monetary policy expectations.
This makes Thursday’s US non-farm payrolls report especially important. A strong print showing continued labour market resilience would likely reinforce the hawkish tilt at the Fed. That, in turn, would put the debasement trade under further pressure, as it becomes increasingly difficult to justify holding non-yielding assets in a world of higher rates and a stronger USD.