By Jack Hough
There was a king of England called Henry VIII who was tall, fat, moderately tyrannical by 1500's standards, and prone to excess in palaces, clothes, wives, and prestige wars. He inherited great wealth from his father, and seized more from monasteries after breaking with the Catholic church, yet still ended up short on cash. So, he issued more of England's silver coins at familiar face values, while gradually changing the base metal to mostly copper with silver coating.
The tell was Henry's nose, which stuck out the most on coin faces and lost its silver first, earning the king the nickname Old Coppernose. Merchants balked at the new money. Prices soared, and wages didn't keep up. The poor, and England's trade reputation, suffered. More than a decade after Henry's death, a daughter of his, Elizabeth I, became queen and restored confidence with a nationwide recoinage.
Monetary debasement used to be easier to spot. Today, Wall Street uses the term "debasement trade" to describe the startling run-up of gold's price. It was $3,400 a troy ounce when I wrote about its rise in a cover story in April, and close to $4,500 when I wrote here in December about metallurgical whataboutism, which has turned entire swaths of the periodic table of elements into portfolio world-beaters. This past week, gold blew past $5,000 to as much as $5,600. Are we debased yet? If not, how will we tell when we get there? What will it mean for stocks and other assets? And is it too late to buy gold? Let me answer these in order of descending confidence, starting at low.
No, we haven't reached monetary debasement. At this point, we're only playing debasement footsie. Economic terms can mean different things to different people, so let's agree on some definitions. Monetary debasement is the process of reducing the value of money, whereas inflation is a gradual rise in prices, so the two look like sides of the same coin, but they differ greatly in method and degree. Central banks like to run a little inflation -- say, 2% a year -- because it keeps people spending rather than hoarding, which is good for growth. The fact that bread used to cost a nickel isn't evidence of debasement. Cash isn't designed to hold its value over decades.
Debasement happens when a monetary regime loses credibility -- think Zimbabwe in the early 2000s or Argentina over much of the past half-century. It can start with emergency government spending, which turns into chronic baseline deficits, bloating debt. Leaders demand low interest rates and exert control over the central bank. Inflation runs consistently above interest rates. Investors sour on government bonds. The government creates money to cover expenses. Citizens convert their pay into anything but local currency. There might be capital flight restrictions or dual interest rates. Businesses prefer to be paid in outside currencies.
Today in the U.S., only some of these apply. Economic growth has long been artificially juiced by large, chronic deficits. Closing deficits would probably trigger a deep recession, and that's not a vote-getter, so politicians lack the will for it. But the 12-month inflation rate looks only a touch high, notwithstanding the lingering pinch of fast price growth during Covid and some continuing run-ups for individual items, like electricity.
President Donald Trump has called for lower interest rates and badgered and threatened to fire Federal Reserve Chair Jerome Powell, and recently his Justice Department issued Powell a criminal subpoena. That's the debasement footsie part. Powell's term is up in May, and Trump will nominate a successor to be confirmed by the Senate. But if the bond market expects runaway inflation, it isn't yet reflected in Treasury demand, yields, or futures. The dollar has fallen relative to other currencies, but from multidecade highs. It remains dominant in trade.
Gold is usually headed higher. The tricky part is how much and how soon. Deutsche Bank recently calculated that gold has outpaced inflation by 279% over 235 years. That's barely a half point a year, compounded, including the recent run-up. On shorter timelines, gold looks great. It has beaten the U.S. stock market over the past 20 years.
Before gold's recent rally, J.P. Morgan had predicted that a 0.5% shift of foreign central bank holdings from U.S. assets into gold could support $6,000 per troy ounce by 2029. That looks conservative now. This past week, the bank initiated coverage on two gold miners, with an Overweight rating on Barrick Mining, already up 231% over the past year, and a Neutral one on Agnico Eagle Mines, up 140%. With the all-in cost of mining gold somewhere around $1,700 an ounce, free cash flow for both companies is exploding.
Too late to buy gold? I don't know. But if someone asks you at a cocktail party, explain that 68% of the price movement in gold over the past year is explained by U.S. policy shifts, according to a statistical technique used recently by UBS called event-targeted vector autoregressions. If the person asks you to explain how it works, just pretend to trip, then throw yourself into the shrimp tower, yell something about a shellfish allergy, and run.
What does soaring gold mean for the U.S. stock market? UBS says it's going up, I think. Stifel says maybe it stays flat. UBS' case rests on solid earnings growth and expectations for more rate-cutting. It recommends that "underallocated investors add exposure to stocks," but it also sees "value in quality bonds, gold, and capital preservation strategies." Is that bullish? Maybe it's steerish, a steer being a neutered bull.
Stifel argues that after three mighty years for S&P 500 gains, the gold price might cap the index at 7000 this year, not far from where it is now. It points out that the ratio of the S&P level to the gold price has broken down recently like only four other times in history, and that each of those left stocks "range-bound for years." Maybe the debasement trade is more like a burp after a big feast. Either way, I recommend a nap.
Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.
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January 30, 2026 02:30 ET (07:30 GMT)
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