Central banks are hedging against US government risk, while investors are betting on American corporate strength. Global capital is not fleeing the United States but is instead reallocating within dollar-denominated assets: central banks are increasing gold reserves to counter fiscal and dollar credit risks, while investors continue to pour into AI, chipmaking, and other core US technology enterprises. This dynamic suggests a future where gold outperforms the dollar, and US equities outperform US Treasuries.
Gold has climbed again. On August 7, US employment data significantly missed market expectations. Non-farm payrolls fell by 23,000 in July, versus a market forecast for an increase of 80,000. The US Dollar Index subsequently dropped 0.44%, while spot gold surged 2.55% to near $4,347 per ounce. The familiar narrative has resurfaced: a weakening US economy, declining rate hike expectations, and doubts over dollar creditworthiness are driving a renewed flight to gold as a safe haven. These explanations are not wrong, but they could have applied a year ago, regardless of whether gold rose or fell. In reality, central banks have been steadily increasing their gold reserves irrespective of price fluctuations, and investors have been persistently concerned about US fiscal deficits, government debt, and dollar purchasing power. Simultaneously, global capital has been consistently buying US equities, particularly in core technology assets like AI, semiconductors, cloud computing, and software platforms.
Central Banks Buy Gold, Investors Buy US Stocks
The market is witnessing a dual phenomenon: buying gold while buying US stocks. The former seems to avoid the dollar, while the latter purchases dollar assets. Are central banks wrong, or are investors mistaken? The answer may be that both are correct. Central banks are concerned about the US government, while investors trust US corporations. Global capital is reducing its reliance on dollar credit, but not its dependence on US assets.
Two distinct balance sheets underpin the dollar. The first is the US government's balance sheet, encompassing fiscal deficits, government debt, interest expenses, inflation, and political credibility. This sheet reflects the government's ability to control spending, stabilize currency purchasing power, and provide the world's most reliable reserve asset. Gold is primarily pricing this sheet. Larger US fiscal deficits and faster debt growth increase the uncertainty of holding dollars and long-term Treasuries. Central banks increasing gold reserves are not necessarily abandoning the dollar, but are certainly reducing their singular reliance on US government credit. The second sheet is the profit and loss statement of core US corporations. This sheet features AI, semiconductors, cloud computing, software, advertising, enterprise services, and global consumer platforms. While the US government's fiscal position may deteriorate, the competitiveness of US corporations may not decline in tandem. The United States still possesses the world's largest technology firms, the most liquid capital market, and the strongest capacity for innovation financing. Global investors find it difficult to locate comparable technology assets of equal scale and global competitiveness elsewhere. Therefore, investors can reduce holdings of long-term Treasuries while simultaneously increasing gold, dollar cash, and US tech stocks. Distrust in US fiscal policy does not equate to distrust in US corporations. The US government's balance sheet is worsening, but the profit sheets of core US corporations remain robust.
Gold's rally serves as a health check for the dollar system. It is often simplistically interpreted as a decline in dollar credit, but this is imprecise. Gold is not an inverse indicator of the dollar index, nor a direct replacement for the dollar system. Instead, it functions more like insurance for the dollar system. Gold carries no sovereign risk; it is not dependent on any single nation's promise to repay principal and interest, nor on any central bank maintaining credit. For central banks, gold's value lies not only in price appreciation but also in the fact that it is not a liability of any country. The sustained central bank gold buying in recent years reflects not an imminent loss of the dollar's reserve currency status, but a rising premium for insuring the dollar reserve system. The US fiscal deficit shows no sign of significant contraction, government interest expenses continue to increase, and tariffs, energy prices, and geopolitical conflicts make future inflation more difficult to predict. The upcoming US midterm elections will also add to this uncertainty. What truly concerns the market is not which party wins more seats, but whether the US will retain the ability to control its fiscal deficit after the elections. Tax cuts can impact revenue, subsidies expand government spending, and tariffs may fuel inflation. A more divided Congress could make fiscal reform even harder. Gold prices are pricing not who wins the election, but whether anyone will be willing to control the deficit afterward. Consequently, there is still support for gold's long-term price floor. However, the existence of a long-term rationale does not guarantee a straight-line continuation of this rapid rebound.
Rate Cut Expectations May Lead to a Gold Correction
Contrary to some market expectations, I believe US inflation expectations will decline over the next two months. If the situation in the Middle East gradually calms, energy prices retreat from highs, and the one-time price impact from the World Cup dissipates, month-on-month US inflation and market inflation expectations could fall. Weakening US employment data will also lower market expectations for further Federal Reserve rate hikes. On the surface, these changes are positive for gold. However, lower rate hike expectations do not necessarily mean falling real interest rates. Real interest rates are roughly equivalent to nominal interest rates minus inflation expectations. If inflation expectations decline faster than US Treasury yields, real interest rates could actually rise. Gold itself generates no interest. Higher real interest rates increase the opportunity cost of holding gold. If investors can achieve higher real returns through US Treasuries, gold's relative attractiveness diminishes. Typically, rising real interest rates lead to falling gold prices. Furthermore, short-term price volatility is significantly influenced by trading structure. The recent gold price rebound has been very rapid, with factors like weaker US employment, a falling dollar, geopolitical risks, and central bank gold purchases being heavily traded. Short-term capital has flowed in quickly, increasing the pool of profit-taking positions. Based on trading data and technical patterns, gold, after its rapid ascent, may need a price correction or sideways consolidation to absorb these gains. My assessment is that while gold's long-term thesis remains intact, this rapid rebound could enter an adjustment phase at any time.
AI Continues to Attract Global Capital to the Dollar
Looking solely at US fiscal conditions and gold might suggest the dollar should weaken. However, the dollar has another crucial source of support. Core US technology companies continue to attract global capital. AI is not an ordinary industry theme; it is impacting investments in semiconductors, cloud computing, software, advertising, enterprise services, and data centers. US corporations occupy many of the most valuable positions in the AI supply chain, including core chips, foundational models, cloud platforms, and software ecosystems, all with high barriers to entry. More importantly, the US capital market can finance massive AI investments. Data centers require significant capital, model training needs sustained funding, and chip development demands long-term investment. Only a sufficiently large and liquid capital market can support industrial investment of this scale. When global investors buy US AI stocks, they are not just purchasing shares in a few companies; they are buying into the US technological system, capital market, and industrial organizational capacity. As long as core US tech companies continue to deliver revenue and profit growth, it will be difficult for global capital to fully exit the US market. A decline in US government creditworthiness may reduce the appeal of long-term Treasuries, but growth in US corporate earnings can still attract capital into US equities. This could create a new structure for dollar assets. Global capital may reduce holdings of long-term Treasuries and increase gold. Simultaneously, it continues to hold dollar cash and allocate to US tech stocks. The dollar's strongest support may no longer be just US Treasuries, but core US corporations. The Federal Reserve determines the dollar's short-term price, but AI determines whether global capital still needs dollar assets.
US Willing to Help Yen, Reluctant to Short the Dollar
The recent joint US-Japan intervention in the yen is a significant case study for understanding US currency policy. The yen previously weakened to near 164 against the dollar. Excessive yen depreciation not only pushed up Japanese import prices but also increased instability in the Japanese government bond market. If Japan were forced to continuously sell dollar assets and buy yen, it could impact the US Treasury market. A yen that is too weak could also undermine the trade effects the US hopes to achieve through tariffs. Therefore, the US was willing to help Japan stabilize the yen. However, the method of intervention was telling. According to a Reuters report, when the US Treasury bought yen, it did not do so by selling dollars; instead, it sold euros to buy yen. This means the US directly participated in the yen market but chose not to short the dollar. The US wanted to hit yen bears but did not want the market to interpret this action as the start of a weak-dollar policy. The US is willing to help the yen but is reluctant to signal a weak dollar to the market. The US government still cares deeply about the dollar's international status. The dollar is not just a currency; it is a major source of US financial influence. Its reserve status lowers financing costs for the US government and corporations and allows the US to more effectively use financial sanctions and capital market tools. The US can accept moderate dollar volatility but will not easily take actions that actively undermine dollar credit. Other major currencies have also not formed a comprehensive replacement for the dollar. The yen received joint intervention support, but Japan's real interest rates remain low. Intervention can clear crowded yen short positions but cannot substitute for Bank of Japan rate hikes. The euro has a large economy, but Europe remains constrained by energy imports, economic growth concerns, and fiscal fragmentation. Even if dollar credit is questioned, capital does not automatically flow into the euro. The Chinese yuan, meanwhile, is in a managed, gradual appreciation range. On August 7, the yuan was near 6.75 against the dollar, having appreciated this year. Export growth, trade surpluses, and corporate FX settlement provide support for the yuan. However, signals from the yuan's midpoint fixing are clear: the policy prefers a stable yuan and allows gradual appreciation based on fundamentals, but it does not want to create rapid, one-sided appreciation expectations. Rapid yuan appreciation would impact exporters and compress domestic monetary policy space. The yuan has a basis for appreciation, but rapid appreciation is not a policy goal.
Gold May Correct, Dollar Might Not Weaken
This brings us back to the initial question: what does it mean to buy gold and US stocks simultaneously? It signifies that global capital is not simply leaving the dollar system but is instead reallocating assets within it. Central banks increasing gold holdings are reducing their concentrated exposure to US government credit risk within the dollar reserve system. Global investors buying US tech stocks are sharing in the technological advantages and profit growth of US corporations. These two behaviors can coexist for a long time. Gold may outperform the dollar. US tech stocks may outperform US Treasuries. The dollar, relative to other major currencies, is likely to remain resilient. The world is reducing its trust in US government credit but remains willing to pay for the profits of US corporations. Central banks use gold to hedge against US government risk, while investors use US stocks to share in the profits of US corporations.
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