Understanding Gold's Recent Surge and Currency Concerns

Sean Gross, CFP®, AIF® | Co-Founder & CEO

October 20, 2025

Gold prices have surged more than 60% this year, climbing above $4,300 per ounce alongside gains in numerous other asset classes. This remarkable advance has generated significant attention and raised questions among investors about whether this rally differs from previous episodes.

The current environment has been characterized by some as a "debasement trade," reflecting concerns that governments may be inclined to diminish currency values through expansive fiscal spending and supportive monetary policies. These factors, combined with a softer dollar, have drawn certain investors toward assets like gold, which are perceived as preserving value, particularly as equity market volatility has increased once more.

Although fiscal deficit concerns are valid, historical evidence demonstrates that forecasting gold's trajectory is challenging. Additionally, multiple factors beyond currencies and interest rates are contributing to broader market strength. For investors with long-term horizons, the key question isn't whether to choose between stocks and bonds versus gold but rather determining the appropriate allocation to each asset class within a well-balanced portfolio.

Most crucially, investors must recognize the distinction between short-term trading opportunities and long-term financial objectives such as generating income and achieving growth, particularly when an asset has already experienced substantial appreciation.

Historical context on currency debasement

Although currency debasement is an ancient concept dating back thousands of years, it remains a recurring concern that reemerges periodically. The traditional meaning of "debasement" describes governments reducing the precious metal content within coins. Historically, this practice enabled governments to produce more coins from identical quantities of precious metal, though it simultaneously diminished each coin's purchasing power.

Today, most currencies operate as "fiat currencies," deriving their value from confidence in the issuing governments rather than backing by gold or other precious metals. Contemporary debasement concerns therefore focus on whether governments might tolerate elevated inflation levels and currency weakness, as this approach would facilitate management of outstanding debt obligations.

This concept relates closely to theories that gained prominence following the 2008 financial crisis. Economists Reinhart and Rogoff, for example, described "financial repression" - policies maintaining artificially suppressed interest rates to diminish the real burden of government debt. Such policies disadvantage savers when interest rates fail to match inflation, eroding cash values. Given the national debt's continued expansion, investor concerns about these policies and the resulting search for value-preserving assets are understandable.

Despite these long-term concerns, current evidence regarding whether this is occurring today remains mixed. First, inflation measures remain persistent but not extreme. The Consumer Price Index, Personal Consumption Expenditures Index, and Producer Price Index all register at 3% or below. Second, bond markets aren't pricing in significant inflation expectations. The 10-year Treasury yield has recently declined to 4% or less, while Treasury Inflation-Protected Securities (TIPS) imply inflation expectations of just 2.3%.

Two additional factors merit consideration. First, central banks globally have been accumulating gold to strengthen their reserves. This trend has intensified amid geopolitical uncertainty and dollar weakness. Second, although the dollar has declined approximately 10% this year, it remains near the upper end of its twenty-year range. From a long-term perspective, the dollar maintains considerable strength relative to historical levels.

Forecasting gold rallies presents challenges

As a speculative investment, gold naturally attracts investor attention. Throughout recent decades, gold has experienced dramatic rallies with varying outcomes. During the late 1970s, gold surged amid concerns about stagflation and Federal Reserve independence. Prices peaked above $800 in 1980 - a level not revisited until 2007.

A comparable pattern emerged following the 2008 financial crisis as central banks implemented substantial stimulus programs. Many investors understandably feared runaway inflation and dollar collapse, neither of which materialized. Gold doubled between 2009 and 2011, reaching approximately $1,900 per ounce, before declining toward $1,000 over subsequent years. This occurred despite the Fed not beginning to reduce stimulus until 2013 or raising rates from zero until 2015.

The accompanying chart compares gold's performance to the S&P 500 since the 2007 market peak. Although gold has delivered strong performance during certain periods, providing diversification benefits, the S&P 500 has delivered superior returns over the complete timeframe. For investors focused on daily market movements, this outcome may seem unexpected. This underscores the importance of evaluating all asset classes from a comprehensive portfolio perspective.

Multiple asset classes have enhanced portfolio performance this year

The present gold rally, which commenced in 2024, has coincided with robust performance across numerous assets, including artificial intelligence-related stocks like the Magnificent 7, international equities, bonds, and cryptocurrencies. The accompanying chart illustrates how various asset classes have contributed to portfolio gains this year. While gold has certainly delivered strong results, individual stocks and other assets consistently outperform in any given year.

For numerous investors, gold serves as part of a broader commodities allocation, potentially connected to other alternative asset classes. The Bloomberg Commodity Index, for instance, initiated the year with a 14.3% target allocation to gold. Combined with other commodities including silver, industrial metals, energy, grains, and additional components, this index has appreciated 10.6% year-to-date.

Additional rationales support maintaining diversified asset class exposure aligned with long-term financial objectives. One fundamental consideration is that gold produces no income, unlike bonds or dividend-distributing stocks. Consequently, portfolios with excessive gold exposure sacrifice the longer-term appreciation potential of equities and the income generation of bonds.

The bottom line? Certain investors are troubled by dollar debasement concerns, especially given gold's continued rally. Investors should consider gold as one element within a flexible, diversified portfolio constructed to support long-term financial objectives.