On Monday, October 13, gold broke above $4,000 an ounce for the first time in history. The milestone capped a year-long rally that has left even seasoned investors questioning whether this is simply another speculative surge or a signal of something deeper: the slow erosion of trust in fiat money — inconvertible paper currency made legal tender by government decree — and the institutions that issue it.

The rally’s timing is telling. Across the developed world, fiscal deficits are swelling, populist movements are gaining influence and central banks are coming under pressure to keep borrowing costs low. The market’s message is not about nostalgia for the gold standard. It is about the price of fiscal dominance — the point at which monetary policy becomes a servant of fiscal policy, and gold becomes the hedge against political convenience.

Populism and the politics of debt

The developed world has entered a new fiscal era. Government debt ratios, already high after the pandemic, now hover around or above 100% of GDP in most advanced economies. Political incentives have shifted from restraint to accommodation. In Britain, Member of Parliament Nigel Farage’s Reform UK party has intensified its criticism of the Bank of England’s bond-selling program, arguing that quantitative tightening is imposing large losses on taxpayers and adding to government borrowing costs. In the United States, US President Donald Trump has called for lower interest rates to help reduce Treasury borrowing costs.

In the euro area, debt politics are becoming just as fraught. France remains locked in a political deadlock over fiscal consolidation, while populist parties in both France and Germany lead the polls. For now, the European Central Bank remains insulated from political pressure, but its independence will be tested if growth slows and bond markets begin to question sovereign sustainability.

These political pressures feed a single narrative: Governments want cheaper money, not austerity. That preference collides with the higher-for-longer reality of post-pandemic inflation, creating the conditions for fiscal dominance.

The arithmetic of unsustainability

Debt sustainability can be captured by a simple identity: When nominal GDP growth exceeds the average interest rate on public debt, the debt-to-GDP ratio falls; when the reverse is true, it rises. From 2008 through the pandemic, that relationship was favorable. Nominal growth was strong, interest rates were low, and debt appeared manageable.

No longer. Inflation has raised borrowing costs, while nominal growth is slowing. The result is a “triple whammy” of slower nominal economic expansion, rising debt service costs and widening primary deficits, which threatens debt sustainability and public finances. Debt-service costs will match growth rates across the developed world. Preventing a runaway rise in debt would require large primary surpluses — tax increases or spending cuts — that remain politically toxic.

Central banks are growing tempted to use monetary policy as a release valve. When they subordinate inflation control to the fiscal needs of the state, they arrive at a predictable outcome: currency depreciation, higher inflation expectations and, historically, a turn toward hard assets like gold.

The rally’s three waves

Gold’s ascent has unfolded in three waves:

1. Although the freezing of Russia’s foreign-exchange reserves in 2022 dramatically underscored the political risks of fiat reserves held abroad, the first wave of movement toward gold diversification had begun much earlier. China, Russia and other emerging economies had been increasing their gold holdings since the year 2000, seeking insulation from the dominance of the US dollar and the reach of Western sanctions.
2. The second wave arrived this April with renewed US trade conflict and geopolitical fragmentation. Washington’s tariffs and sanctions policies signaled to other governments that the dollar’s role as a stable anchor of the global system could no longer be taken for granted.
3. The third began this September, when the Federal Reserve (or the Fed) signaled that rate cuts were likely despite inflation still being above its 2% target. Days later, political figures revived calls to influence the composition and direction of the Fed. The prospect of a politically constrained central bank reignited what Wall Street has dubbed the “debasement trade.”

A barometer of trust

Gold is a peculiar asset. It yields nothing and offers no dividend. Its price, therefore, says less about intrinsic value than about trust in alternatives. As Citadel CEO Kenneth C. Griffin observed weeks ago, sovereigns, central banks and investors now “view gold as a safe harbor asset in a way that the dollar used to be viewed.”

That sentiment shows in the behavior of reserve managers. Since 2022, central banks have bought gold at the fastest pace in half a century, led by emerging economies seeking insulation from sanctions and currency volatility. The aggregate market value of their official gold holdings outside the US now rivals their holdings of US Treasuries. Gold has overtaken the euro as the second-largest component of global reserves.

China’s central bank was a key buyer through 2024, as trade frictions and tariff hikes intensified. But recent data show that Chinese purchases have slowed, and the so-called “Shanghai premium” — the spread between domestic Chinese gold prices and London spot price — has turned negative. Western investors, through exchange-traded funds and futures markets, have taken over as the main drivers of the rally.

Gold-linked exchange-traded funds have added more than 16 million ounces since mid-2024. Though still below the pandemic-era peak of 3,929 metric tons, recorded in November 2020, the renewed inflows underscore the return of retail and institutional appetite for insurance against both inflation and policy uncertainty.

A puzzle in the bond market

Curiously, bond markets have yet to panic. Long-term inflation expectations, measured by five-year forward breakevens, remain anchored near 2% in both the US and the euro area. Investors still appear to trust central banks to keep inflation in check.

That stability contrasts sharply with movements in other asset classes. The dollar is down more than 10% from its early-year peak. Equities, which benefit from nominal growth and pricing power, have set new highs. Gold’s 51% surge completes the triangle of contradictory market signals: faith in long-term monetary credibility, fear of political interference and a speculative hunt for hedges.

This can be interpreted in two ways. One is segmentation, where bond investors price macro fundamentals while gold buyers price institutional risk. Another is temporal, where the bond market assumes short-term discipline while the gold market discounts long-term erosion. Both interpretations can be true at once.

No return to the gold standard

Gold’s rally has inevitably revived talk of the gold standard. Such nostalgia is misplaced. The classical gold standard, dominant from the 1870s to 1914, bound currencies to fixed convertibility into gold and transmitted deflationary shocks across borders. Its discipline was real but brutal: Recessions deepened, and unemployment soared whenever adjustment was required. Attempts to resurrect it in the interwar years collapsed under the weight of social and political strain.

Today’s flirtation with gold is not about re-establishing metallic money. It is about credibility. Fiat systems function only as long as governments and central banks behave as if constraints still exist. Gold’s rise signals investors’ doubt that such discipline will hold.

Central banks in the debasement trade

What makes the current episode unusual is that central banks are not merely observers — they are participants. Their own gold purchases have amplified the rally, creating a feedback loop between sovereign anxiety and market pricing. As they diversify away from dollar assets, they simultaneously reinforce the perception that fiat money is fragile, even as they attempt to insure against that very fragility.

The irony is that the US, as the ultimate issuer of fiat currency, has benefited as well. Marked to the market, the US’s official gold holdings now exceed $1 trillion, roughly 90 times their historical balance-sheet value. Gold’s ascent, far from signaling US weakness, has inflated one of its few tangible reserve assets. In effect, the same forces that erode trust in paper money have quietly enriched its primary issuer.

Yet the debasement trade — the wager that inflation will ultimately serve as a political escape valve for debt — has limits. Should the global economy stabilize and disinflation persist, the justification for record-high gold prices will weaken. The Fed and the European Central Bank still possess both the tools and, thus far, the credibility to prevent an uncontrolled inflation spiral. Fiscal politics may challenge them, but institutional inertia remains powerful.

For now, investors remain divided. Equity markets bet on resilient growth and technological productivity. Bond markets bet on central-bank discipline and policy continuity. Gold bets on neither. It bets on the possibility of error, on the chance that democracies burdened by rising debts and aging populations will eventually choose inflation over restraint.

The last-resort metal

Gold’s surge is therefore less about commodity fundamentals than about political economy. Whether this proves an overreaction or a rational hedge depends on what follows. Renewed fiscal consolidation and monetary discipline could deflate the trade; a slide toward politicized central banking could propel it further.

Either way, gold at $4,000 is not a return to the past. It is a warning about the present — the visible price of invisible fiscal choices.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.