Summary of Key Points
Recently, assets such as gold and Bitcoin have experienced significant declines. On the surface, these fluctuations are due to hawkish signals from the Federal Reserve (which may maintain high interest rates) and the easing of tensions in the Middle East. However, there are two underlying narratives in the global financial markets: in the short term, liquidity is dominated by the Fed; in the long term, the global sovereign credit system is undergoing a transformation. Gold and Bitcoin are no longer just ordinary investments but are becoming core assets that do not rely on the credit of any single country. Central banks around the world are buying gold in large quantities, and institutions are investing in Bitcoin, reflecting concerns about the credibility of the US dollar (given the high level of US debt). Short-term fluctuations do not indicate long-term trends. The key question for the next decade is whether the US dollar will continue to be the sole global credit anchor, and what roles gold and Bitcoin will play in the new financial system.
1. Short-Term Drops: Caused by Fed Interest Rate Hikes
Why have gold and Bitcoin suddenly plummeted? Simply put, the Fed has signaled that money will become tighter, prompting investors to shift their funds to US dollar assets that generate interest. The new Fed chair, Powell, has indicated a possible continuation of high interest rates or even further hikes, meaning that depositing in US dollars or buying US Treasury bonds will yield higher returns, while gold and Bitcoin do not generate any income. As a result, investors have sold these assets to switch to dollar-based investments, leading to their prices falling.
This has been the prevailing logic for decades: the Fed sets interest rates → interest rates affect the attractiveness of the US dollar → the US dollar affects market liquidity → the amount of money in the market determines asset prices. These recent fluctuations are a normal reaction to this short-term narrative and are not surprising.
2. Central Banks Buying Gold: Not for Hedging, but as a Backup
Why has gold been able to rise even when the US dollar has been strong in recent years? The reason is that the main drivers of gold prices have shifted from individual investors to central banks. According to the World Gold Council, central banks have been net buyers of gold for several years, with annual purchases exceeding 1,000 tons (a record high), including countries like China, India, and Turkey. The Chinese Central Bank has been increasing its gold reserves consistently since the end of 2022. This is driven by concerns about the credibility of the US dollar, which is essentially a “credit note” issued by the US government. With the US debt at $40 trillion (120% of GDP) and continuing deficits, there are fears that the dollar could depreciate if the country fails to repay its debts. Therefore, central banks are buying gold as an asset that is not subject to the whims of any government; gold has no issuer and does not depend on the debt situation of any nation.
3. Gold and Bitcoin: Fellow “Non-Sovereign” Assets
Many refer to Bitcoin as “digital gold,” but this is more than just a marketing slogan. Both assets share the same fundamental principle: they are independent of national credit. Gold was the “non-sovereign asset” of the industrial era, while Bitcoin represents this in the digital age. They both address the same question: if you don’t want to put all your wealth in the currency of one country (e.g., the US dollar), what alternative should you choose? The correlation between gold and Bitcoin has grown stronger recently; they both decline when the Fed takes a hawkish stance and rise when there are issues with sovereign credit. Moreover, Bitcoin is evolving from a speculative asset to an investment preferred by institutions, as evidenced by the approval of spot Bitcoin ETFs in the US, attracting significant institutional capital (with a total market value exceeding $1 trillion). In the short term, both are influenced by the Fed; in the long term, they are competing for the title of global store of value.
4. The True Nature of Geopolitics: It’s About Currency Systems
People often say that wars are good for gold prices, but wars do not directly determine them; instead, they affect currency systems. For example, tensions in the Middle East could lead to a blockade of the Strait of Hormuz (which transports 20% of global oil), causing oil prices to rise and inflation to increase, which might prompt the Fed to raise interest rates and tighten liquidity, leading to gold price declines. Conversely, peace between the US and Iran would reduce inflationary pressures and weaken expectations of Fed rate hikes, resulting in lower gold prices. Geopolitics is merely a starting point; what ultimately affects prices are liquidity (in the short term) and credit systems (in the long term).
5. The Big Question for the Next Decade: Who Will Be the New Global Credit Anchor?
Over the past two decades, global financial markets have focused on when the Fed will lower interest rates. In the next decade, the question will be whether the US dollar can still serve as the sole global credit anchor. This reflects a fundamental difference between short-term and long-term trends: in the short term, the Fed plays a key role; in the long term, the global credit system is being restructured. Central banks’ increasing gold holdings, the promotion of domestic currency settlements by various countries, and the adoption of Bitcoin by institutions are all signs of this transformation. The recent decline in gold prices does not mark the end of the “golden age” for gold; rather, it serves as a reminder to avoid mistaking short-term fluctuations for long-term trends. What really matters is how the US dollar, gold, and Bitcoin will distribute wealth within the new global credit system.
In summary: In the short term, we need to watch the Fed’s actions; in the long term, we must consider the reshaping of the global credit system. The true value of gold and Bitcoin lies in the broader concerns about the credibility of the US dollar.