“Debasement Trade” Material or Overstatement?

In recent weeks, the so-called “debasement trade” has gained popularity in the market — the idea that we are entering a period of extreme erosion in the purchasing power of major global currencies (with the US dollar at the forefront), making it necessary to shift allocations exclusively toward real assets. In particular, the price movements in precious metals and some industrial metals are seen as clear evidence that such a process is already underway.

Fears of monetary debasement are mainly linked to public debt levels that are difficult to manage and to the chronic reliance on fiscal deficits by major governments. This, combined with a potential loss of central banks independence, could lead to inflationary episodes far worse than those experienced in recent years, effectively destroying the purchasing power of the dollar.

US Core Cpi yoy. Source: Bloomberg

Debasement Trade: Our view

We believe that debasement fears are largely overstated. There is no doubt that reliance on fiscal deficits remains excessive, especially in the United States, and managing public debt will likely require generally accommodative monetary policies, with some risk of inflationary episodes. However, there is currently no clear evidence of ongoing debasement: inflation in the US and Europe is declining, inflation expectations remain well anchored, the bond market is relatively stable, and public deficits are slightly narrowing, although they remain at elevated levels.

The move in metals is mainly justified by a conflict-driven geopolitical environment, which has pushed some countries to accumulate commodities to increase strategic independence. On top of this bullish move, a speculative mania — particularly in silver — has developed, which has little to do with monetary debasement. Supporting this view, many energy and agricultural commodities have not shown any meaningful price increases.

5yr5yr Usd inflation swap rate. Source: Bloomberg

Debasement View: Investment implications

In light of the debasement risk assessment, we maintain a constructive stance on duration risk. Term premia already offer higher compensation for holding longer duration. To mitigate inflation risk, we prefer to implement the trade on the longer end via inflation-linked bonds. At the same time, we remain short the US dollar: a monetary debasement scenario is not required to trigger a depreciation of the greenback against other currencies, as has already happened in several past economic cycles.

Debasement risk is not imminent, but it remains a potential future outcome depending on fiscal and economic policy choices. In this respect, we closely monitor political developments in the United States, which — if they point to a renewed deterioration — could lead us to revise our strategy.