Gold Resilience: Dollar Debasement Looms as Markets Reprice

The price of gold plummeted over 25% in January as investors scrambled to sell amid rising inflation fears and strengthening dollar. The reversal was unexpected, given that central banks were buying gold and investors anticipated a rate cut from the US Federal Reserve. However, the West Asia oil shock did not weaken the dollar as expected but instead strengthened it.

According to Manish Bhandari, CEO of Vallum Capital Advisors, the current situation is a purchasing-power story, which is gold's territory. The problem lies not only in the quantity of US debt, now exceeding $40 trillion, but also in the disappearance of traditional buyers of Treasuries.

Foreign private purchases have fallen sharply, and foreign official institutions have been selling. The Fed has reduced its holdings through quantitative tightening. China's Treasury holdings are at their lowest since 2008, while Japan has also reduced its exposure.

The US government can still find buyers for Treasuries but only by offering higher yields or shortening maturities. Japan's decision to end yield-curve control in 2024 made the yen less reliable as a funding currency. The Treasury's subsequent decision to double long-bond buybacks reinforced the message that policymakers are sensitive to yields.

Markets appear to understand this shift, with gold rising 10.2% after the intervention. Gold was trading not merely as a commodity but as an alternative to policy-managed money. Central banks and other official institutions bought 288.9 tonnes of gold in the second quarter, 62% more than a year earlier.

The World Gold Council recommends that investors hold a strategic allocation of 5-10% of their portfolio in gold, with 7.5% as a reasonable benchmark. New investors should build exposure gradually through low-cost ETFs or regulated funds and rebalance annually.