Why Wall Street Is Buying Gold Like It's 2008 Again?

The international gold market has just witnessed a historic explosion—prices have surged nearly $200 from around $3,860, smashing through the unprecedented $4,000 mark.

This remarkable rally has left many veteran precious metals traders deep in thought: "What exactly is driving this gold boom?"

Data shows that this latest surge past $4,000 was primarily fueled by Western investors. Yet, with gold prices already at record highs, a key question arises—why do these investors remain so eager to buy?

According to many Wall Street institutions, the answer may lie in what's known as the "debasement trade."

The Rise of the "Debasement Trade"

In nearly every recent analysis explaining gold's meteoric rise, this phrase has taken center stage.

It also helps resolve a long-standing puzzle for many investors: in recent months, the U.S. dollar has actually stabilized—in fact, it even hit a two-month high this week. Gold and the dollar rising together is an anomaly.

Therefore, interpreting the "debasement trade" merely as a hedge against a weaker dollar would be too narrow. What's really happening is that Western investors—especially in the U.S.—are seeking protection against a broad decline in purchasing power across all fiat currencies. Those losing faith in the dollar and other major currencies have been pouring into gold, Bitcoin, and other alternative assets, fueling the momentum behind this trend.

As economist Robin Brooks of the Brookings Institution pointed out, the dollar has remained stable since August—suggesting that the recent rally in gold reflects waning confidence in "all" fiat currencies, not just the greenback.

This sentiment is being reinforced by global political developments. Last weekend, Japan effectively welcomed a new prime minister; by Tuesday, gold had broken through $4,000—a coincidence that is likely not accidental.

Sanae Takaichi, who unexpectedly won the leadership of Japan's ruling Party, is known for her dovish stance on fiscal and monetary policy. She advocates stronger economic stimulus and supports the Bank of Japan in avoiding sharp rate hikes. Her victory triggered a sharp depreciation of the yen, while Japanese equities and bond yields both soared.

Meanwhile, in Europe, populist "Reform UK" leader Nigel Farage—whose party currently leads in U.K. polls—recently slammed the Bank of England's bond-selling policy, arguing that taxpayers are footing the bill for resulting losses and higher rates.

While the European Central Bank remains institutionally independent, political pressures are mounting. France has cycled through four prime ministers in little over a year amid debt tensions, and populists who once called for exiting the euro now lead polls in both France and Germany.

Chris Weston, head of research at Pepperstone Group, summed it up: "These political situations give you a reason to buy gold and Bitcoin as debasement hedges. It's become a big momentum trade. There's nothing that breeds sentiment like a market that's going up — you've got to be in it."

Gold's Three-Phase Rally

Looking at the price trajectory, this rally has unfolded in three distinct phases.

"Phase One" began in 2022 after the full-scale Russia-Ukraine conflict, when Western nations froze Russia's foreign reserves. In response, central banks worldwide began accumulating gold to avoid the risk of asset seizures.

"Phase Two" took off in April this year, triggered by President Trump's trade war—an event that rattled confidence in the U.S. as a stabilizing force in the global economy and in the dollar's dominance within that system.

"Phase Three" started in late August, when Federal Reserve Chair Jerome Powell signaled rate cuts at the global central banking summit, despite inflation remaining above the 2% target. Days later, President Trump attempted to fire Fed Governor Lisa Cook—accusing her of mortgage data fraud—in what many saw as an effort to tighten political control over the Fed. Cook denied the allegations and has so far retained her post.

During this period, the rise in gold has increasingly become a speculative frenzy rather than purely a fundamental story.

Gold, after all, produces no income—so whether $4,000 per ounce is justified is difficult to measure. Traditionally, its value lies in its "safe-haven role"—a shield against geopolitical turmoil, economic distress, or loss of faith in fiat currencies.

Debt Mountains Add to Gold's Luster

Despite differing circumstances, Japan, the U.S., and Western Europe share a common challenge: "debt." Public debt levels have reached or neared 100% of GDP across these regions.

A simple formula gauges debt sustainability: when the average interest rate on debt is lower than nominal GDP growth, the debt-to-GDP ratio tends to fall; when the reverse is true, it rises. From 2008 to 2022, government debt ballooned due to the financial crisis and the pandemic, but low rates kept it manageable.

Today, however, inflation has returned and rates are rising—shifting the balance.

Morgan Stanley recently warned that developed economies now face a "triple threat" of slower nominal growth, higher debt costs, and worsening fiscal deficits, posing serious challenges to debt sustainability. By 2030, the bank projects that debt-servicing costs will match economic growth rates. Avoiding explosive debt growth would require significant budget surpluses—meaning deep spending cuts or major tax hikes.

France's latest government collapse illustrates just how politically unfeasible that is.

In the U.S., Trump inherited an annual deficit of roughly 6% of GDP and total debt near 100% of GDP. Despite tariff revenues offsetting parts of his latest tax cuts, potential Supreme Court rulings could erase that income stream. Meanwhile, partisan battles over healthcare subsidies have already triggered a government shutdown.

Trump argues there's an easier fix: push the Fed to cut rates, reducing debt-servicing costs. But once a central bank prioritizes fiscal relief over inflation control—a condition known as "fiscal dominance"—the result is typically runaway inflation.

Morgan Stanley's chief global economist, Seth Carpenter, noted that while the Fed's post-Powell future is uncertain, "Trump has the authority to appoint new members, and he's made his intentions clear." Carpenter warned that Fed policy could shift dovish, weakening the dollar, lifting inflation expectations, and pushing gold higher still.

Matt Stucky, senior portfolio manager at Northwestern Mutual Wealth Management, added, "The debasement trade has real momentum this year. Gold and Bitcoin have both performed strongly. Lower real yields and a Fed cutting rates despite persistent inflation provide an extra catalyst for asset prices."

J.P. Morgan strategists echoed this, saying the "debasement trade" accelerated in Q3 as retail investors piled into gold and Bitcoin ETFs. Bitcoin ETF inflows surged after Trump's April 2 tariff announcement and lasted through July; gold ETF inflows then caught up starting in August, narrowing the gap.

According to J.P. Morgan, retail investors remain more active in this trade, but institutional players are catching up—buying Bitcoin and gold futures since early 2024.

Komal Sri-Kumar, former global strategist at TCW Group and now president of a California-based advisory firm, said he views the debasement trade primarily through the lens of gold. "There is no real safe haven left in the current monetary system—that's precisely why gold is so attractive." He warned that political pressure on the Fed could force sharp rate cuts, reigniting inflation and pushing long-term yields higher, potentially causing bond losses.

Sri-Kumar had already predicted that gold would surpass $4,000 this year. "There's no way to benefit from the safe-haven appeal of currencies when various currencies are being debased. I believe the rally in gold will still continue whether the government shutdown ends very quickly or whether it continues for an extended period."