In recent months, a phenomenon known as debasement has wiped the slate clean on that rationale. This cumulative shift has driven gold, bitcoin, and fairness prices to file highs. Traditionally, this term means the loss of quality or value of money. Yet, it is making a comeback as governments face escalating fiscal pressures compounded by rapid currency depreciation. It is hard to overstate how much these changes matter. Investors are dealing with an increasingly unstable environment and looking to shelter themselves by investing in alternative assets.
The term “great debasement” recalls a historical period during the reign of Henry VIII when the English monarch diluted the content of gold and silver in coins with less valuable metals. This extreme step was initially designed to support lavish living and military conquests, but served only to reduce public trust in the currency. Today, we witness a contemporary twist of this practice. After all, fiat currencies are depreciating before our eyes as governments borrow and spend recklessly.
Currency Depreciation and Its Impacts
The US dollar used to be the bedrock of global finance. This gradual response is evident, although it has since the beginning of this year tumbled by roughly 9% against a basket of other currencies. This unexpected decline has led to questions about the viability of its status as the world’s reserve currency, heightening fears amongst investors. As the dollar continues to fall, gold has emerged once again as the go-to safe haven. For the first time, its prices have skyrocketed to $4,000 an ounce!
Gold prices have shot up in the past month. This jump comes just after the Federal Reserve’s dovish surprise declared at Jackson Hole on August 22. Since then, gold has appreciated by 18%. Investors are pouring into gold as a protection against declining currencies. This speaks to a broader trend and increasingly stronger appetite to “de-dollarise and de-risk” their investment portfolios. As Ken Griffin, founder and chief executive of Citadel, noted on this alarming turn in the climate around US sovereign risk.
“A strategic bitcoin allocation could emerge as a modern cornerstone of financial security, echoing gold’s role in the 20th century.” – Marion Laboure and Camilla Siazon
Compounding these problems are geopolitical unrest and raw political realities at home. The potential for a US government shutdown, France’s budgetary impasse, and Japan’s prime minister’s support for aggressive public spending have sparked concerns about debt sustainability among major economies. Not surprisingly, this climate leaves no doubt that a growing number of governments are not doing enough. They should be passing real spending cuts or tax increases to actually reduce borrowing.
The Surge in Alternative Assets
With traditional assets now seeing significant turbulence and macroeconomic headwinds, alternative investments such as gold and bitcoin have boomed in popularity with investors. Inflows into gold exchange-traded funds (ETFs) hit an all-time quarterly record in the third quarter, driven by an uncertain macroeconomic outlook. Investors are pouring into these alternative assets, looking for a safe haven from the turmoil in traditional markets.
Bitcoin’s recently celebrated growth this year has been phenomenal. Its value has been increasing all year, up more than 20% since January, and recently crossing the $125,000 threshold for the first time. This recent resurgence is indicative of the fact that bitcoin is likely establishing itself as a legitimate reserve asset in addition to gold. Its decentralized nature provides an increasingly attractive alternative to fiat currencies, which many now see as susceptible to debasement.
This decade is shaping up to be the most painful on record for anyone holding government bonds, according to new data from Deutsche Bank. And traditional investments are taking a beating these days. People like billionaire investor Paul Tudor Jones think the stock market has a lot to do on its upside. He commented on the situation that is fertile for a market explosion rather than an eventual crash.
“My guess is that I think all the ingredients are in place for some kind of a blow-off.” – Paul Tudor Jones
Additionally, the historical record of debasement should act as a red flag. Many experts warn that the same dynamics could play out today, with ghosts of previous financial catastrophes haunting current markets.
“History rhymes a lot, so I would think some version of it is going to happen again. If anything, now is so much more potentially explosive than 1999.” – Paul Tudor Jones
Looking Ahead: Central Banks and Future Predictions
Markets are never static. As they expand, more and more optimistic predictions about the future role of assets such as bitcoin and gold on central bank balance sheets are taking hold. According to Deutsche Bank’s Marion Laboure and Camilla Siazon, alternative assets should have an increasingly important place in central bank reserves. They hope to see this change take place between now and 2030. This transition has the potential to transform the very nature of our financial systems and change the way investors think about asset allocation.