Gold has set multiple records in just the first month of the year: 1) Its ascent has exceeded almost everyone's expectations. While bullish sentiment on gold was already mainstream, a 25% surge within a single month is unprecedented since the 1980s, likely catching even the most ardent gold bulls off guard; 2) After briefly surpassing $5,500 per ounce, it experienced a sharp "discount," plummeting over 10% in a single day—a volatility event not seen since 1984. The firm believes that to decisively end this gold trend, it is necessary to see the United States begin paying a substantial price to address the "pick-two" dilemma of low inflation, low interest rates, and dollar hegemony, thereby rebuilding confidence in US Treasury bonds and even in the United States itself. CICC's main views are as follows:
What is driving gold's rise? A partial substitution for dollar credit triggered by distrust in the US. Traditional drivers like inflation hedging and safe-haven demand can explain only a portion of gold's ascent, but certainly not such a massive rally. This has caused gold prices to deviate from traditional pricing models. The more fundamental underlying force is the partial substitution for dollar credit, often termed "de-dollarization," triggered by distrust in the US (specifically, the US during the Trump era). This represents gold's "ultimate value." It's not difficult to observe that over the past couple of years, many geopolitical and policy risks have originated from the US itself, rendering the US dollar, which traditionally serves as a safe haven, ineffective. A simple comparison reveals that during the latter half of the Biden administration (2022-2024), despite facing a series of issues similar to the present—such as the Russia-Ukraine conflict, a weaker dollar, high US debt levels, and rising inflation—gold's gains were less pronounced than during Trump's second term. From the starting point of this bull market in gold in September 2022 until the election in November 2024, the price of gold rose by only 50% over two years. In contrast, gold has surged over 100% within the first year of Trump's current term.
What are the issues with US Treasuries themselves? "Rigidification" of debt servicing constraints, "internalization" of holding structures, and "erosion" of relative value. Beyond policies during the Trump administration that damaged global trust, whether US Treasuries themselves remain "safe" is a tangible reason prompting global monetary authorities and investment institutions to consider diversification. In other words, would this trend reverse if a new president were elected in the future? "No longer safe" does not imply imminent default, but rather reduced returns and a marginal decline in credit quality, specifically manifested as: "Rigidification" of debt servicing constraints: Although US debt cannot default, its supreme status naturally demands impeccable safety. The interest coverage ratio (interest expense / fiscal revenue) for US debt has climbed steadily since 2021 to a record high of 18.5%, exceeding the 15% "warning line" used by agencies like S&P and Moody's in sovereign credit ratings. Increasing interest payment pressure also means that the US's fiscal discretion and flexibility to maintain debt sustainability are narrowing, crowding out other fiscal expenditures—in other words, the "quality of affordability" of US debt is declining. "Internalization" of holding structures: The changing proportion of US Treasuries held by foreign investors reflects the global demand strength for US debt as a safe asset. This indicator fell consistently from a high of 34% in 2014 to 23% in 2022, before edging up slightly to the current 25%. This shift from a global reserve asset towards a pattern more akin to ordinary sovereign debt signifies a weakening of the "extra credit demand" previously enjoyed by US Treasuries. "Erosion" of relative value: The ratio of gold's nominal value to US Treasuries has risen steadily from 0.35 in 2022 to 0.99 currently. The persistent increase in this metric reflects a marginal decline in investor preference for US dollar-denominated sovereign credit assets, with a turn towards physical gold for ultimate value preservation. Simply put, from a fundamental perspective, high interest rates, high interest payments, and high leverage also make US Treasuries subject to criticism and concern.
What does gold's scale surpassing US debt signify? Not an immediate numerical tipping point, but a crucial psychological watershed. For countries already engaged in "de-dollarization," the need to increase gold reserves is self-evident. However, for those still within the dollar system, especially wavering "centrists," once US debt is perceived as being downgraded from the "world's only risk-free asset" to merely "an ordinary high-risk sovereign asset"—no longer special, unique, or absolutely safe—it could trigger a self-fulfilling cycle of expectations. "De-dollarization" cannot be achieved quickly, nor does it need to materialize immediately, but confidence is eroded bit by bit. Sometimes, the mere existence of doubt is sufficient to prompt some investors to begin considering diversification needs, even if the process is slow. Of course, this process must be viewed rationally. In the foreseeable future, the US dollar and US Treasuries are unlikely to be fully replaced. It is undeniable that the dollar's reserve currency status remains robust. A more plausible scenario is a partial loosening of the dollar system, moving from singularity towards plurality. Furthermore, the process of "de-dollarization" is entirely capable of reversing or even experiencing setbacks, and the "old order" will not passively accept being replaced. Potential variables include: a new US president changing course, re-embracing globalization, or at least actively cooperating with allies to regain trust; the US economy rediscovering a foundation for robust growth; the US emphasizing fiscal discipline coupled with the Federal Reserve forcefully restraining financial expansion, using short-term pain to rebuild trust in US Treasuries as safe assets; or even administrative measures targeting gold, such as sales, controls, or punitive taxation.
Can we judge if the gold trend has ended now? Not yet; it requires the US to pay a high price to resolve trust issues in the US and its debt. The firm believes that to decisively end this gold trend, it is necessary to see the United States begin paying a substantial price to address the "pick-two" dilemma of low inflation, low interest rates, and dollar hegemony, thereby rebuilding confidence in US Treasury bonds and even in the United States itself. Drawing on the experience of the 1970s, a significant correction in gold prices requires several conditions, while ending the trend necessitates resolving issues at three levels: trust in US debt, trust in the US, and asset returns. The US must emphasize fiscal discipline and the Federal Reserve must forcefully restrain financial expansion to resolve the issue of trust in US Treasuries. If a combination of "Warsh-like" rate cuts and balance sheet reduction can be successfully implemented, it represents a new attempt worth close monitoring. The sharp gold decline on January 30th was, to some extent, a psychological rehearsal for a "Volcker moment," indicating a potential shift in thinking. The impact of quantitative tightening alone is less significant (gold prices fell slightly by 0.4% and 1.9% respectively one month after the QT in 2017 and 2022). However, this path requires strong willpower and the alignment of favorable timing (AI), favorable conditions (financial markets), and popular support (political environment). The US and the Fed might still have an opportunity to rebuild confidence in the dollar and US debt, but if this window is missed, things could spiral out of control. The US must change course, re-embrace globalization, or at least actively cooperate with "allies" to regain trust, thereby resolving the issue of trust in the US itself. This requires that Trump no longer cause geopolitical disturbances; market expectations for his term are currently low, and observations can be reassessed after the midterm elections. The US economy must rediscover a foundation for robust growth to resolve the issue of asset returns. This requires a significant upswing in the US credit cycle, with AI being the most likely candidate to shoulder this responsibility alone. Neither interest rate cuts nor fiscal expansion can fundamentally solve the underlying problems of US debt. The government could implement control measures. Administrative actions targeting gold, such as sales, controls, or punitive taxation—for instance, the US government publicly selling gold as it did in 1975—would increase short-term volatility but not address the root cause.
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