Gold prices have jumped more than 60% this year, climbing above $4,300 per ounce. This big increase has many new investors asking questions about what it means.
Some people call this the “debasement trade.” This term refers to worries that governments might weaken their currencies by spending more than they collect in taxes and by keeping interest rates low. When combined with a weaker dollar, these concerns have led some investors to buy gold as a way to protect their money’s value.
While concerns about government debt are real, history shows that predicting gold prices is very hard. Also, many different factors are driving investment returns right now—not just currencies and interest rates. For long-term investors, the key question isn’t whether to choose gold over stocks and bonds. Instead, it’s about finding the right mix of different investments that matches your goals.
What is currency debasement?
Currency debasement is an old concept that comes up every few years. Originally, it meant that governments would reduce the amount of precious metal in coins. This let them make more coins from the same amount of metal, but each coin was worth less.
Today, most currencies are “fiat currencies.” This means their value comes from trust in the government that issues them, not from gold or other metals backing them up. Modern debasement concerns are about whether governments will allow higher inflation (rising prices) and a weaker currency to make their debt easier to manage.
Right now, there’s mixed evidence about whether this is actually happening. Inflation measures are all at 3% or lower—not extreme levels. Also, the bond market isn’t expecting high inflation. The 10-year Treasury yield has recently fallen to 4% or less, and Treasury Inflation-Protected Securities (TIPS) suggest investors expect only 2.3% inflation.
Two other points are worth noting. First, central banks around the world have been buying gold to strengthen their reserves, partly due to uncertainty and the weaker dollar. Second, while the dollar has declined about 10% this year, it’s still quite strong compared to the past twenty years.
Gold rallies are hard to predict
Gold has had dramatic rallies before with mixed results. In the late 1970s, gold surged to above $800 in 1980—a level it didn’t reach again until 2007. After the 2008 financial crisis, gold doubled from 2009 to 2011, reaching about $1,900 per ounce. It then fell back toward $1,000 over the next few years.
The accompanying chart compares gold’s performance to the S&P 500 since 2007. While gold has had strong periods, the S&P 500 has still done better over the full time period. This shows why it’s important to think about all investments as part of a complete portfolio, not just focus on daily market movements.
Many types of investments have done well this year
The current gold rally, which started in 2024, has happened alongside strong performance in many other investments. This includes technology stocks like the Magnificent 7, international stocks, bonds, and cryptocurrencies. The chart shows that many different asset types have contributed to investment returns this year.
For many investors, gold is just one part of a broader mix that might include other commodities (raw materials like oil, metals, and grains). It’s also important to remember that gold doesn’t generate income like bonds or dividend-paying stocks do. A portfolio too heavily weighted toward gold gives up the long-term growth potential of stocks and the income from bonds.
The bottom line? While some investors are concerned about the weakening dollar and attracted to gold’s recent rally, it’s best to view gold as just one piece of a complete portfolio that matches your long-term financial goals.
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