For the better part of a year, markets have rewarded what many have called the ‘dollar debasement’ trade of being long gold while structurally underweight the US dollar. Persistent fiscal deficits, a politically pressured Federal Reserve and a tolerance for inflation were all seen as forces that would erode the real value of the dollar over time, while hard assets and alternative stores of value would benefit.
That story has been challenged more recently with the arrival of Kevin Warsh as the new chair of the US central bank. Warsh has a well-established record of prioritising price stability and has been a persistent critic of the risks of running policy too loose for too long. Even without a radical change in policy yet, markets no longer seem as sure the Fed will necessarily sit back and let the US dollar slide in real terms.
As you can see in the chart below, this has resulted in a swift reassessment of asset prices. Gold and silver, which had seen strong inflows on the back of the debasement theme, have given back a notable chunk of their gains. Bitcoin has been hit even harder, as a crowded trade built on the idea of ever easier money meets the story of a Fed taking a firmer stance on inflation and balance sheet discipline. The US dollar, which had been on the back foot against a basket of major currencies, has stabilised and, in some, cases recovered.
Gold, copper, silver and bitcoin prices
“Even without a radical change in policy yet, markets no longer seem as sure the Fed will necessarily sit back and let the US dollar slide in real terms.
Source: LSEG Workspace.
There is a second layer to this that has compounded the move. The tentative easing of oil supply stress – with tanker flows through the Strait of Hormuz gradually recovering and Brent retreating from its highs – has taken some heat out of the near-term inflation picture. One of the market’s most acute near-term fears has faded and, with it, some of the urgency behind real-asset protection.
The US has not, however, resolved its long-term debt problems. Fiscal arithmetic still points to heavy debt issuance and a growing interest bill. Low domestic savings leave the US reliant on overseas investors to help fund that borrowing – a funding backdrop that is not growing easier. Political pressure on the Fed is unlikely to have disappeared either.
The shift has been in the market’s perception of the Fed’s reaction function. Under Warsh, investors now see a central bank that may be more inclined to lean against inflation risk and less willing to underwrite a prolonged period of negative real rates. Recent commentary has also pushed markets towards pricing a tighter path for US policy than had previously been assumed, reinforcing the move higher in real yields and helping the dollar to steady.
Reprieve, not regime change
From today’s starting point, this looks more like a reprieve for the US dollar than a full regime change. Gold’s current weakness partly explains this – some of it simply reflecting a crowded position that has been cut back now there is a clear catalyst to do so.
Investors who had seen gold as a one directional hedge against policy error are being reminded that the asset can be volatile and entry point and positioning do matter. For our part, the decision to trim gold exposure in October 2025 and again at the start of February 2026 helped reduce participation in the subsequent correction, while keeping gold as a measured strategic diversifier rather than a dominant theme.
But the longer-term backdrop has not gone away. The structural arguments that fed the debasement trade in the first place remain visible: large fiscal deficits, a growing debt burden and the risk that overseas demand for US treasuries becomes less reliable over time. If anything, Warsh’s arrival simply challenges the timing of the trade rather than erases the underlying conditions that gave rise to it.
The combination of a firmer US dollar and higher real yields has implications for how specific asset classes behave.”
This episode reinforces the importance of not building portfolios around a single macro story – however persuasive it may appear at the time, the path is unlikely to be smooth. Market expectations overshoot and then adjust. A diversified mix of assets that can cope with different inflation and currency outcomes remains preferable to a binary bet on one theme.
The combination of a firmer US dollar and higher real yields has implications for how specific asset classes behave, with a stronger dollar tending to tighten financial conditions at the margin – particularly for weaker borrowers outside the US who have dollar liabilities. The equity allocations across our own funds are already tilted towards businesses with robust balance sheets, durable cashflows and pricing power, rather than those most reliant on cheap money or a permanently soft dollar.
Gold still has a role to play as a strategic diversifier, but recent price action is a reminder it is not a free option. In multi asset portfolios, exposure to gold and other real assets sits alongside a range of other diversifiers, including government bonds, credit and alternative strategies.
The current drawdown in precious metals does not undermine the case for holding them over the long term as part of a broader toolkit – it does, however, highlight the risk of treating them as an all-weather solution to every policy concern. Gold now sits between 4% and 5% of our multi asset funds, which is in line with its role as a strategic diversifier alongside equities, bonds and other real assets, rather than as a dominant macro call.
The dollar debasement trade has not been disproved – it is simply a reminder that markets rarely move in straight lines.
Elliot Farley is CEO & fund manager at T. Bailey Asset Management
