(Kitco News) – The recent uptick in geopolitical tensions and the approaching U.S. Presidential election have led to a spike in volatility across markets as traders scramble to preserve their wealth amid rising uncertainty. According to analysts at JPMorgan, gold and Bitcoin (BTC) are becoming the assets of choice.
“Rising geopolitical tensions and the coming U.S. election are likely to reinforce what some investors call the 'debasement trade' thus favoring both gold and Bitcoin,” JPMorgan Global Markets Strategy analysts, led by Nikolaos Panigirtzoglou, said in a note on Thursday.
They noted that while gold initially showed a more muted response to recent geopolitical events, that changed over the past quarter as its price rose sharply, approaching the $2,700 per ounce level on Sept. 26.
“This increase in gold prices is influenced by a 4-5% decline in the dollar and a significant drop in real U.S. Treasury yields by 50-80 basis points,” the analysts said. “However, the appreciation of gold has exceeded what these factors alone would suggest, indicating a re-emergence of the ‘debasement trade.’”
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JPMorgan said the “debasement trade” is being driven by a combination of factors, including heightened geopolitical uncertainty since 2022, significant government deficits in major economies, persistent inflation concerns, and weakening confidence in fiat currencies, especially in some emerging markets.
Pointing to data from the International Monetary Fund, the analysts highlighted that the share of the U.S. dollars in currency reserves fell to a new low of 57% in the third quarter, down from 58.2% in the second quarter.
Looking at gold priced in euros, they pointed out that the yellow metal had appreciated more than what would have been expected by changes in the inflation-adjusted 10-year yield and said from here, “There is little doubt that the pace of central bank purchases is key to gauging the future trajectory for gold prices.”
The JPMorgan team also touched on speculative demand from institutional investors by examining U.S. Commodity Futures Trading Commission (CFTC) data, finding bullishness for gold and Bitcoin futures, while Ethereum (ETH) futures show tepid interest.
“To us, this suggests that speculative institutional investors such as hedge funds might see gold and Bitcoin as similar assets, i.e. both as beneficiaries of the so-called ‘debasement trade,’ but not Ethereum,” they said. “In addition, the fact that Bitcoin ETFs started seeing inflows again in September after an outflow in August suggests that retail investors might also see gold and Bitcoin in a similar fashion.”
They expect this debasement trade to continue to see gains amid rising geopolitical tensions and the U.S. election. In their opinion, a win by Trump would boost Bitcoin via a more friendly regulatory regime, while his threats of tariffs would reinforce the debasement trade as they are expected to increase tensions and lead to an expansionary fiscal policy.
Bitcoin and crypto are the one asset class that has priced in a Trump victory, they noted. “This is because investors have been rather occupied in recent months with the recession trade. If we envisage the Trump trade in a similar fashion to 2016, i.e. higher [U.S. Treasury] yields, stronger dollar, outperformance of U.S. vs non-U.S. equities, outperformance of U.S. banks and tighter credit spreads, so far we have seen only little shift in markets,” they said.
