Author: CICC Insights

Introduction: Is $5,500 the ceiling that gold can reach, or the beginning of a revolutionary change?

In just one month since the start of the year, gold has set several records: 1) The rate of increase has exceeded almost everyone's expectations. Although being bullish on gold is the mainstream view in the market, the increase of 25% in just one month is the first time since the 1980s, which is probably unexpected even for most gold bulls; 2) After briefly exceeding $5,500/ounce, it experienced a "full reduction", with a drop of more than 10% in one day, which is also unprecedented since 1984.

Faced with this massive volatility of sharp rises and falls, any point-based calculations appear pale and powerless because: 1) Gold prices have clearly transcended simple fundamentals, so traditional gold calculation models such as real interest rates have long become ineffective; 2) The grand narrative of geopolitical and monetary system restructuring, which has a greater impact, is difficult to provide a specific timetable for realization, instead giving people room for arbitrary speculation in the short term; 3) The sharp rise in gold prices in the short term is largely driven by emotions and funds, making the rhythm even more difficult to grasp.

Chart 1: Gold and real interest rates decoupled after 2022

Source: Wind, CICC Research Department

Chart 2: The explanatory power of our four-factor model (USD, real interest rate, uncertainty, and momentum) for gold prices has recently declined.

Data source: Bloomberg, Wind, CICC Research Department

These three factors make it difficult to simultaneously consider both direction and time in gold price calculations, not to mention the fluctuations during the process. This highlights the true value of "dollar-cost averaging." For example, in our annual outlook published last November, "Following the Direction of Credit Expansion," we deduced a "level" of $5,500 per ounce based on the fact that the size of the gold reserves equaled the size of US Treasury bonds. However, we did not anticipate that it would be reached in just three months. Some might say that as long as the direction is correct, time is not so important. This is not the case. Imagine if this level were to materialize in three years instead of three months, who would be willing to heavily invest in the short term for a three-year long-term opportunity? Not to mention whether one could hold on during the violent fluctuations along the way.

In fact, the sharp rise in gold prices, the surge in volatility, and the massive inflow of ETFs have already subtly marked the "price" of the rise. The holdings of SPDR Gold ETF, the world's largest gold ETF, have rebounded to levels similar to those seen during the Russia-Ukraine conflict in 2022. Furthermore, the correlation coefficient between ETFs and gold prices has risen to 0.98 over the past two years, a historical high. All of this indicates that sentiment has reached a certain level of exuberance. As for Warsh's nomination, it merely acted as a catalyst for the storm. Otherwise, why haven't US stocks, bonds, and the US dollar experienced such significant volatility?

Chart 3: Gold's 14-day RSI reached 90, remaining in overbought territory.

Source: Bloomberg, CICC Research Department

Chart 4: Gold's volatility has increased significantly, exceeding that of other assets.

Source: Bloomberg, CICC Research Department

Chart 5: Correlation between gold prices and ETFs reaches its highest level since data became available.

Source: Wind, CICC Research Department

However, setting aside the short-term sharp rises and falls, gold exceeding $5,500/ounce is indeed an important watershed, marking that the total value of gold reserves (US$38.2 trillion) is equivalent to the total stock of US Treasury bonds (US$38.5 trillion)[1]. This is the first time since the 1980s, which means that the global edifice established after the collapse of the Bretton Woods system, anchored by the US dollar and based on US Treasury bonds, has shown some signs of loosening.

Chart 6: Our calculations show that when the gold price rises to $5,500/ounce, the size of the outstanding gold reserves will be equivalent to the size of the outstanding US Treasury bonds…

Data sources: Wind, IMF, WGC, UCGS, CICC Research Department

Chart 7: ...This is the first time it has appeared since the 1980s.

Data sources: Wind, IMF, WGC, UCGS, CICC Research Department

Gold, long absent from the daily operation of the international monetary system, has surprisingly risen to the same level as US Treasury bonds, the foundation of the dollar and possessing strong settlement and trading convenience. Is this the ceiling gold can reach, or the beginning of a revolutionary change? Coincidentally, gold prices immediately faced a sharp correction upon reaching this level, seemingly indicating the sensitivity of this position. The answer to this question depends on whether the US can rebuild trust in US Treasury bonds, and also determines whether gold will face a "Volcker moment"—this is the key issue we will discuss in this article.

I. What are the driving forces behind the rise in gold prices? Partial substitution of the dollar's credibility due to distrust of the United States.

What factors are driving this bull market in gold? Understanding the reasons is crucial for predicting the future. To answer this question, let's start by analyzing several key factors influencing gold prices:

► Is it due to a weakening dollar? Yes, it's a major contributor, but not as significant as in the 1970s. The dollar dominates commodity pricing, and a weakening dollar strengthens gold's reserve value. Since 2022, gold has entered a new bull market, rising 239% from a high of $1622/ounce in September 2022, coinciding with a 16% drop in the dollar index from its high of 114 in September 2022 to its current level of 96. Recent policy "chaos" by Trump since the beginning of the year has increased market concerns about escalating geopolitical risks and fueled expectations of "de-dollarization," causing the dollar to fall to a near four-year low ("What Does Trump Want?"). However, the negative correlation between gold prices and the dollar in this bull market (R² = 0.23 since 2022) is lower than in the 1970s bull market (R² = 0.57).

Chart 8: The current gold bull market since September 2022 corresponds to a weakening US dollar.

Source: Wind, CICC Research Department

Chart 9: The R2 for gold prices and the US dollar since 2022 is 0.23.

Source: Wind, CICC Research Department

Chart 10: The R² for gold prices and the US dollar in the 1970s was 0.57.

Source: Wind, CICC Research Department

► Is it because of lower real interest rates? No. Real interest rates are key to the traditional pricing framework of gold, and can be seen as the opportunity cost of holding gold, as well as a manifestation of gold's anti-inflationary properties. However, while real interest rates rose from a high of 1% in September 2022 to a peak of 2.5% in October 2023, gold prices rose against the trend. Looking further ahead, since November 2025, the upward slope of gold prices has steepened again, but even with fluctuating expectations of US interest rate cuts, the overall rise in real interest rates from 1.7% to 1.97% cannot explain this surge in gold prices.

► Is it due to safe-haven demand amid geopolitical risks? That's also an important factor. Since 2022, geopolitical risks have been frequent. After Trump's re-election as president in 2025 and the implementation of "reciprocal tariffs," the uncertainty index of US economic policy has risen rapidly, corresponding to a steeper upward slope in gold prices.

Chart 11: The US economic policy uncertainty index has risen significantly since 2025, accompanied by a steeper upward slope in gold prices.

Source: Wind, CICC Research Department

► Is it driven by capital inflows? Yes, capital inflows accelerated the rise. 1) Central Bank Reserves: Since the Russia-Ukraine conflict in 2022, central banks in emerging Asian countries, represented by China, have increased their gold reserves. The year-on-year change in global emerging central bank gold reserves rose from a low of -244 tons in August 2024 to a high of 578 tons in January 2024, which can explain the rise in gold prices from 2022 to 2024 (Chart 13). After 2024, central banks continued to increase their gold reserves, but at a slower pace. 2) Private Sector: Correspondingly, the holdings of the SPDR Gold ETF (the world's largest gold ETF, accounting for 27%) rose from a low of 821 tons in March 2024 to the current 1087 tons, and the correlation coefficient between ETFs and gold prices over the past two years has also risen to its highest point since data became available, proving that the recent rise in gold prices is also largely related to the inflow of speculative funds from the private sector.

Chart 12: Since August 2022, emerging countries have increased their gold reserves, driving up gold prices.

Data source: Wind, IMF, CICC Research Department

Chart 13: SPDR Gold ETF holdings have rebounded rapidly, approaching levels seen during the 2022 Russia-Ukraine conflict.

Source: Wind, CICC Research Department

A simple analysis reveals that while traditional inflation and safe-haven demand can explain some of the gold price increase, they cannot explain such a significant rise. This is what causes the gold price to deviate from traditional pricing models. The more crucial underlying driver is the partial substitution of the dollar's credibility due to distrust of the United States (specifically, the US under Trump), the so-called "de-dollarization," which is the "ultimate value" of gold. It's not hard to see that in the past year or two, many geopolitical and policy risks have originated precisely from the US itself, rendering the dollar, which could have served as a safe haven, ineffective. A simple comparison is that while the latter half of the Biden administration (2022-2024) also faced similar challenges as the current situation, such as the Russia-Ukraine geopolitical situation, a weakening dollar, high US debt, and rising inflation, gold's gains were less than those during Trump's second term. From the start of this gold bull market in September 2022 to the election in November 2024, gold prices rose by only 50% in two years, while now, in the year since Trump took office, gold prices have risen by over 100%.

II. Problems with US Treasury bonds themselves? Rigid debt repayment constraints, internalized holding structure, and shrinking relative value.

Besides the damage to global trust caused by Trump's policies, the question of whether US Treasury bonds are still "safe" is a real reason prompting global monetary authorities and investment institutions to consider the need for diversified asset allocation. In other words, if a new president were to take office, would this trend be reversed? "No longer safe" does not mean default has begun, but rather a decrease in returns and a marginal decline in credit quality, specifically manifested in:

► Debt repayment constraints become "rigid": Although US debt is unlikely to default, its superior position naturally requires it to have more perfect security. The interest coverage ratio (interest expense/fiscal revenue) of US debt has continued to climb to a record high of 18.5% since 2021, exceeding the 15% "warning line" set by institutions such as S&P[2] and Moody's[3] when rating sovereign credit. The increase in interest payment pressure also means that in order to maintain the sustainability of debt, the fiscal discretion and flexibility of the United States are also narrowing, crowding out other fiscal expenditure space. In other words, the "quality of US debt that can be repaid" is declining.

► Endogenous Holdings: Changes in the proportion of US Treasury bonds held by foreign investors reflect the strength of global demand for US Treasury bonds as safe-haven assets. This indicator has been declining steadily from a high of 34% in 2014 to 23% in 2022, before rising slightly to the current 25%. This shift from a global reserve asset to a conventional sovereign debt model means that the "extra credit demand" previously enjoyed by US Treasury bonds is weakening.

► Relative value "shrinkage": The ratio of gold's nominal value to US Treasury bonds has been rising steadily from 0.35 in 2022 to the current 0.99. This continuous rise reflects the marginal decline in investors' preference for US dollar sovereign credit assets, turning instead to physical gold to seek the ultimate value safe haven.

Chart 14: The US interest coverage ratio climbed to a record high of 18.5%, while the proportion of foreign investor holdings declined along a trend.

Source: Haver, CICC Research Department

Chart 15: The value of gold relative to US Treasury bonds has steadily increased from 0.35 in 2022 to the current 0.99.

Source: Haver, CICC Research Department

In short, from a fundamental perspective, high interest rates, high interest payments, and high leverage also make US Treasury bonds a source of criticism and concern.

III. "De-dollarization" through replacing US Treasury bonds with gold? Two clearly defined camps: some are increasing their gold holdings, while others are still increasing their US Treasury bond holdings.

Distrust of the United States and the problems inherent in US debt have jointly driven a partial substitution of dollar credit, which is "de-dollarization" and the core driving force behind the rise in gold prices. However, so far, "de-dollarization" is merely a clear-cut "dualistic" division.

The reason for this statement is that we have noticed that some monetary authorities are selling US Treasury bonds and buying gold (mainly in Asia and emerging countries, such as the central banks of China, Turkey and India, which have increased their holdings by 357 tons, 253 tons and 133 tons respectively since 2022), while other monetary authorities are continuing to buy US Treasury bonds to new highs (such as the UK, Japan and Belgium, which have increased their holdings by $165.7 billion, $141.1 billion and $106.4 billion respectively since 2025), forming two distinct camps.

Chart 16: Since 2022, China, Türkiye, India and other countries have increased their gold reserves the most.

Source: Wind, CICC Research Department

Chart 17: Since 2024, Japan, the United Kingdom, Belgium and other countries have increased their holdings of US Treasury bonds.

Source: Wind, CICC Research Department

The divergence in gold price increases across regions and ETF fund flows also reveals a clear trend: 1) Breaking down gold price increases since 2025 by time period, as of January 29th, the Asian session saw a 33.5% increase, significantly higher than the 9.7% increase in the European session and the 11.2% increase in the American session. Furthermore, the strong upward trend in gold prices since 2026 has primarily been driven by the Asian session, with increases of 11.4%, 0.3%, and 2.0% in the Asian, European, and American sessions, respectively. 2) Looking at gold ETF fund flows by region, recent net inflows have mainly come from Asia and North America, with net inflows of $4.95 billion and $4.89 billion since 2026, respectively. Europe, on the other hand, has only seen inflows of $3.36 billion since 2026.

Chart 18: Since 2025, gold prices have risen by 33.5%, 9.7%, and 11.2% respectively during the Asian, European, and American trading sessions.

Source: Wind, CICC Research Department; Data as of January 29

Chart 19: Recent inflows into gold ETFs are mainly from Asia and North America.

Source: WGC, CICC Research Department; Data as of January 23

A closer look reveals significant differences in the motivations of major global countries regarding their holdings of gold and US Treasury bonds. We construct quadrants based on the proportion of gold in official foreign exchange reserves exceeding 15% (global median) and the proportion of US Treasury bonds in foreign exchange reserves (since TIC data includes total holdings by both foreign official and private sectors, the proportion may exceed 100% for some countries). Specifically: 1) High US Treasury Bonds + Low Gold: This includes export-oriented economies still operating under the dollar system and seeking liquidity. Holding a high proportion of US Treasury bonds can meet the needs of frequent cross-border trade settlements and provide liquidity during exchange rate fluctuations. Notably, Canada and Norway do not hold any gold in their official foreign exchange reserves, but their US Treasury bond holdings are equivalent to 372% and 242% of their reserves, respectively. 2) Low US Treasury Bonds + High Gold: This includes Germany and Italy, which have a long history of gold reserves; Turkey, which has significantly increased its gold holdings to combat high inflation and currency credit crises; and Russia and Poland, which have proactively "de-dollarized" for security strategies. 3) Low US Treasury holdings + Low gold holdings: Diversified portfolios, represented by China, India, South Korea, Brazil, and Mexico, avoid blindly relying on the US dollar and excessively hoarding gold. 4) High US Treasury holdings + High gold holdings: The Netherlands and France employ a "double insurance" mechanism, holding a high proportion of US Treasury bonds while maintaining significant gold reserves. Compared to 2023, before the gold price surge, Norway, Canada, Singapore, and South Korea significantly increased their holdings of US Treasury bonds, while Turkey, Russia, Italy, Poland, Germany, and China noticeably increased their gold holdings.

Chart 20: Four Quadrants of Gold and US Treasury Bonds as a Percentage of Foreign Exchange Reserves

Source: Haver, CICC Research Department; data is the 2025 average.

Chart 21: Compared to the end of 2023 before the gold price surge, Norway, Canada, Singapore, and South Korea significantly increased their holdings of US Treasury bonds, while Turkey, Russia, and Italy noticeably increased their holdings of gold.

Source: Haver, CICC Research Department

This indicates that "de-dollarization" has not yet risen to a global consensus; rather, it's more of a matter of "two distinct groups doing different things." After all, for most countries and economies still within the dollar system, there's no need to de-dollarize, and there are no better alternatives. However, for another group, facing risks such as sanctions and the weaponization of dollar reserve assets, de-dollarization is an unavoidable and necessary choice. In that case, increasing gold reserves becomes an almost inevitable option, and these demands have become the main driving force behind the price increases of the past few years.

The question now is whether the tariffs imposed on the world, especially its allies, and various actions challenging the existing international order since Trump's second term began in 2025, coupled with the fact that gold has surpassed the key dividing line of US Treasury bonds, will lead to the blurring of the lines between these previously clearly defined camps? Will this cause more and more markets belonging to the US Treasury bond camp to turn to gold?

IV. What does it mean that the size of gold reserves exceeds that of US Treasury bonds? It's not an immediately tangible numerical milestone, but it represents a significant psychological turning point.

What will happen once gold prices surpass the key watershed of US Treasury stock? Will it prompt more central banks in the middle ground to consider a more diversified anchor and increase their gold holdings? Will Trump's continued challenges to the existing international order and his use of tariffs as a weapon force traditional allies to re-evaluate their ties to the dollar? Will the ever-increasing US debt and interest payments, coupled with persistently high bond yields and inflation, cause ordinary investors holding US Treasury bonds to worry about short-term returns and the sustainability of US fiscal policy?

In this sense, gold surpassing US Treasury bonds is not an immediate mathematical milestone, but rather a significant psychological watershed. For countries that have already "de-dollarized," increasing gold reserves is undoubtedly necessary. However, for those still within the dollar system, especially the wavering "middle ground," the perception that US Treasury bonds are being downgraded from "the world's only risk-free asset" to "an ordinary high-risk sovereign asset," no longer special, unique, or absolutely safe, could create a self-fulfilling prophecy. "De-dollarization" cannot be achieved quickly, nor does it need to be immediately realized, but confidence is always eroded gradually. Sometimes, simply having this question is enough to prompt some investors to consider diversification, albeit a slow process.

Of course, we also need to view this process rationally. In the foreseeable future, it will be difficult for the US dollar and US Treasury bonds to be completely replaced. It is undeniable that the US dollar's reserve currency status remains solid. What is more likely is that the dollar system will experience partial loosening, moving from a singular focus to a more diversified one.

1) Reserve share: As of the third quarter of 2025, the US dollar still accounted for 57% of reserve currencies, far higher than other currencies. However, if calculated as a percentage of global reserve assets, the proportion of US Treasury bonds held by foreign officials (21.3%) is already lower than that of gold (28.6%, calculated based on the latest gold price).

Chart 22: As of the third quarter of 2025, the US dollar still accounts for 57% of global reserve currencies, far higher than other currencies.

Source: IMF, CICC Research Department

Chart 23: Based on the latest gold price, gold's share of global reserve assets has exceeded the share of foreign official holdings of US Treasury bonds in global reserve assets.

Data source: IMF, U.S. Treasury Department, CICC Research Department; Gold percentage calculated based on the latest gold price on January 30.

2) International Payments Share: As of December 2025, the US dollar accounted for 50.5% of global payments, far exceeding the second-ranked euro (21.9%). The global banking system (SWIFT) and derivatives transactions are mostly pegged to US Treasury bonds, forming a certain network effect, and the cost of switching systems is extremely high.

Chart 24: As of December 2025, the US dollar accounted for 50.5% of SWIFT global payments, far exceeding other currencies.

Source: SWIFT, CICC Research Department

3) Trade finance share: As of December 2025, the US dollar accounted for 79.5% of the global trade finance market, far exceeding the second-ranked RMB (8.3%).

Chart 25: As of December 2025, the US dollar's market share in global trade finance was 79.5%.

Source: SWIFT, CICC Research Department

4) There is no alternative to the US dollar. While gold is valuable, it does not generate interest. It can serve as a safe-haven and store of value asset when the dollar's credibility is damaged, but it cannot replace the function of fiat currency in interest rate liquidity supply and asset pricing. Furthermore, due to its physical limitations, it cannot support the massive global trade settlements. The Eurozone market lacks sufficient depth, and the renminbi's incomplete capital account opening is insufficient to fully accommodate a $38 trillion asset pool. More importantly, the so-called "dollar hegemony" lies not only in the credit of the US government and the economic strength of the United States, but also in its military and technological power. As long as these remain, the dollar's credit system will continue to have a foundation for its continuation.

Furthermore, the process of "de-dollarization" could very well be repeated or even reversed, and the "old order" is unlikely to willingly allow itself to be replaced. Possible variables include: a new US president changing course and embracing globalization again, or at least actively cooperating with allies to regain trust; the US economy finding new growth drivers; the US emphasizing fiscal discipline and the Federal Reserve strongly curbing financial expansion, thus rebuilding trust in US Treasury bonds as safe assets through short-term pain; and even administrative measures such as controlling gold, selling gold, and imposing taxes. In the 1980s, gold surpassed US Treasury bonds in value, but ultimately, at the great cost of Volcker's aggressive interest rate hikes, trust in US Treasury bonds was restored, securing the dollar's global hegemony for the next forty years.

V. Are there any historical lessons to be learned? The two instances of exceeding [a certain threshold] in the 1970s and 80s began with runaway inflation and ended with aggressive interest rate hikes.

After the collapse of the Bretton Woods system in the 1970s, there were two periods in which the size of gold exceeded that of US Treasury bonds[4]: 1) April 1974 - April 1975 (lasting a total of 13 months, exceeding the last eight months when gold peaked and rose by 9%): It began with the depreciation of the US dollar after the collapse of the Bretton Woods system and the high inflation brought about by the first oil crisis, and ended with the easing of inflationary pressure and the US government selling gold to intervene in the gold price. 2) May 1979 - September 1983 (lasting a total of 53 months, exceeding the last seven months when gold peaked and rose by 244%): It began with the geopolitical conflict and stagflation caused by the second oil crisis, and ended with Volcker's tough interest rate hike in 1979.

Chart 26: Two relatively long periods in the 1970s and 1980s saw gold prices exceeding US Treasury bonds.

Source: Wind, CICC Research Department

Chart 27: However, it ultimately ended with Volcker's significant interest rate hikes, leading to a substantial strengthening of the US dollar.

Source: Wind, CICC Research Department

1) The first time gold prices surpassed US Treasury bonds: In April 1974, gold prices peaked eight months later, with a gain of 9%.

The collapse of the Bretton Woods system led to a depreciation of the dollar, which, combined with high inflation and a US recession caused by the first oil crisis, pushed gold prices to surpass US Treasury bonds for the first time in 1974. In March 1973, major currencies switched to floating exchange rates, effectively ending the Bretton Woods system and accelerating the dollar's depreciation. In October 1973, OPEC announced an oil embargo, causing Brent crude oil prices to surge from $2.7 per barrel to $13 per barrel. This increased inflationary pressure in the US, negative real interest rates, and a recession further exacerbated the dollar's depreciation and the appreciation of gold.

After gold prices surpassed those of US Treasury bonds, the Federal Reserve's stance on interest rate hikes became hesitant. Rising oil prices pushed the CPI up further in 1974, reaching a high of 12.3% in December of that year, while real interest rates fell to -4.9%. However, under stagflationary pressures, the Federal Reserve quickly shifted to an easing stance, with the federal funds rate beginning to decline in July 1974. This meant that monetary policy failed to make its "due contribution" in curbing inflation and gold prices. Gold prices rose from $168 per ounce in April 1974, when gold prices surpassed those of US Treasury bonds, to a high of $184 per ounce in February 1975.

How to reverse it? 1) Supply-side inflationary pressure subsided: Starting in January 1975, oil prices turned negative year-on-year, leading to a two-year decline in the US CPI. 2) Government direct intervention in the gold market: In December 1974, the US government announced the lifting of the ban on residents holding gold. The Federal Reserve interpreted this as a signal that "the government has decided to end the monetary function of gold"[5]. Subsequently, starting on January 6, 1975, the US government began to publicly auction gold reserves[6], increasing market supply and curbing the upward trend of gold prices.

However, the Federal Reserve did not completely solve the inflation problem. According to the Philadelphia Fed’s research [7], the Fed’s hesitant attitude during this period strengthened inflation expectations and was eventually reflected in higher inflation data; although the CPI declined year-on-year in 1975-1976, it remained above 5.0%. This also laid the groundwork for more stubborn inflation and a larger increase in gold prices in 1979-1980.

2) The second time gold prices surpassed US Treasury bonds: In May 1979, gold prices peaked seven months later, with a gain of 244%.

The escalation of geopolitical conflicts and stagflation during the second oil crisis led to gold prices surpassing US Treasury bonds again in 1979. From the latter half of 1978, the situation in Iran gradually spiraled out of control, culminating in the Iranian Islamic Revolution in early 1979, triggering the second oil crisis. 1) Geopolitical Conflict: Unlike the first oil crisis where OPEC initiated embargoes and price increases, the uncertainty surrounding the internal political order of oil-producing countries reached its peak this time, and the escalation of geopolitical conflicts provided further impetus for gold price increases. 2) Stagflation: Brent crude oil prices surged from $12/barrel to $42/barrel, and supply-side pressures again pushed inflation upward, causing real interest rates to turn negative. Gold prices rose even more dramatically than before, soaring from $247/ounce in May 1979 to a high of $850/ounce in January 1980.

Shortly thereafter, Volcker took a hard line against inflation. In August 1979, Volcker became Chairman of the Federal Reserve. Fortunately, although the United States was suffering from high inflation at the time, fiscal pressure was not significant, and the high inflation even diluted some of the pressure. The ratio of US debt to GDP gradually declined from 1978 to 1979, reaching only 30-31% when Volcker took office (vs. the 2025 average of 121.5%); although the government interest coverage ratio rose to 9.2% in 1979, the increase was manageable compared to 7.5% in 1970, and significantly lower than the 2025 average of nearly 20%. This provided considerable room for monetary policy tightening. In October 1979, Volcker announced that the policy target would be directly shifted to "money supply," meaning that the upward movement of the federal funds rate would be unrestrained.

How did this reversal happen? Volcker's aggressive interest rate hikes, coupled with the "Reagan Cycle," led the US out of stagflation and a significant strengthening of the dollar. On one hand, under Volcker's "extreme" monetary tightening, the effective federal funds rate surged from 11.4% before October 1979 to 19.1% in January 1981. The CPI, after peaking in April 1980, began to cool, driving real interest rates back up from a low of -4.6% in June 1980 and turning positive in November of that year. On the other hand, President Reagan's series of tax cuts and deregulation policies after taking office in 1981 led to a renewed economic boom in the US. The dollar, after hitting a low of 85 in 1980, resumed its appreciation trend, reaching a high of 180 before the Plaza Accord in 1985. Gold prices gradually declined from July to September 1980, but due to the previous excessive price increases, the size of US Treasury bonds did not surpass that of gold until 1983. Volcker’s tough monetary policy successfully broke the self-fulfilling mechanism of inflation[8], and there has been no long-term situation where “the nominal size of gold exceeds that of US Treasury bonds” since then.

VI. The current "dilemma" for the United States: a choice between low inflation, low interest rates, and dollar hegemony; it will be difficult to rebuild trust in US debt without a "cost".

It is not hard to see that after the scale of gold surpassed that of US Treasury bonds in the 1980s, it was at the huge cost of Volcker's strong interest rate hikes, which was "killing a thousand enemies while losing eight hundred of your own", that inflation was anchored, trust in US Treasury bonds was rebuilt, and the dollar's global hegemony was obtained for the next forty years.

For the US government and the Federal Reserve, a current "dilemma" is that they want low inflation, low interest rates to lower debt costs, and to maintain the dollar's hegemonic status. While Volcker sacrificed the second (low interest rates) by aggressively raising rates, the situation is different now. Although inflation is much lower, the sheer size of the debt and the burden of interest payments make it far more difficult to anchor inflation and rebuild confidence in US debt through significant rate hikes: 1) The current US debt is $38.5 trillion, representing 122% of US GDP, far exceeding the $8 trillion, or 31% of GDP, in 1979. 2) The current interest coverage ratio (interest payments to fiscal revenue) is 19.8%, far higher than the 9.2% in 1979 when gold reserves exceeded US debt.

Chart 28: Current US debt pressure is far greater than in the 1970s

Source: Haver, CICC Research Department

An "ideal" scenario for the US and the Federal Reserve would be: 1) A new variable suddenly emerges that solves inflation, such as AI significantly improving productivity, leading to substantial wage and commodity deflation; 2) In this scenario, the Federal Reserve could achieve financial repression by reducing its balance sheet while lowering short-term interest rates, and moderately raise long-term interest rates to enhance the attractiveness and trustworthiness of US Treasury bonds. This is precisely the core proposition of Kevin Warsh, the newly nominated chairman of the Federal Reserve. Therefore, to some extent, the sharp drop in precious metals after Warsh's nomination was a prelude to the "Volcker moment."

Chart 29: Newly nominated Federal Reserve Chairman Warsh advocates for interest rate cuts and balance sheet reduction.

Sources: CNBC, Hoover Institution, Reuters, CICC Research Department

However, the actual process may be fraught with challenges and not as simple as it seems. For example: 1) How much efficiency improvement can AI bring? Can it effectively drive down inflation? 2) Won't the Fed's balance sheet reduction affect the adequacy of financial liquidity and cause market turmoil, especially considering the upcoming midterm elections, making it hesitant to act? 3) Won't balance sheet reduction increase the financing cost of US Treasury bonds? The weighted maturity of existing US Treasury bonds is 5.8 years, which is less than the 8.8-year weighted maturity of the US Treasury bonds held by the Fed. It is indeed possible to maneuver by "selling long and lowering short," but the process may not be so "smooth." Should the Fed start YCC to stabilize long-term interest rates? But if so, wouldn't selling more short-term bonds contradict interest rate cuts? 4) If interest rate cuts are too large, will it reignite inflation expectations? Or will it benefit gold? 5) If ultimately faced with a "two-choice" between protecting bonds and protecting the exchange rate, the exchange rate is undoubtedly the least costly option. A proactive and significant devaluation like the Plaza Accord of the 1980s may not be realistic, but moderately increasing the tolerance for inflation and a slight devaluation of the dollar can effectively alleviate the pressure of existing debt (using cheaper money in the future to repay more expensive money now). However, at the cost of damaging long-term trust in US debt, gold will ultimately benefit.

Chart 30: Outstanding US Treasury bonds are mainly medium- and long-term bonds, with short-term bonds accounting for only 21.6%.

Source: Haver, CICC Research Department

Chart 31: The Federal Reserve's holdings of US Treasury bonds are mainly medium- and long-term bonds.

Source: Haver, CICC Research Department

7. Can we conclude that the gold trend has ended? Not yet. The US needs to spend a significant amount of money to resolve the trust issues surrounding the US and its debt.

Returning to the question posed at the beginning of this article, is $5,500/ounce the ceiling that gold can reach, or the beginning of a new era? We believe that to completely end this trend in gold, we need to see the United States begin to pay a heavy price to solve the "two out of three" dilemma of low inflation, low interest rates, and dollar hegemony, and rebuild confidence in US debt and even in the United States itself.

But how much further can it rise? Frankly, we can't give a definitive answer. After the last two surges, gold rose by 9% once and doubled the other time. However, one thing is certain: gold has entered uncharted territory, unseen for decades. The old order cannot be allowed to be replaced (will the newly nominated Fed Chairman Warsh become the Volcker of the new era?). Therefore, intense competition and volatility are inevitable. For investors, while long-term trends are important, they are too grandiose; short-term fluctuations, while affecting position size, are more grounded in reality, further highlighting the value of "dollar-cost averaging."

Drawing on the experience of the 1970s, a significant correction in gold prices requires the following conditions, while the end of the trend depends on resolving issues related to trust in US Treasury bonds, trust in the US government, and asset returns:

► The US emphasizes fiscal discipline, and the Federal Reserve is strongly curbing financial expansion to address the issue of trust in US Treasury bonds. If the combination of Walsh's interest rate cuts and balance sheet reduction can succeed, it would be a novel approach worthy of close attention. The sharp drop in gold prices on January 30th was, to some extent, a psychological rehearsal of the "Volcker moment," representing a potential shift in thinking. The impact of balance sheet reduction itself isn't that significant (gold prices fell slightly by 0.4% and 1.9% respectively in the month following balance sheet reductions in 2017 and 2022). However, this path requires strong will and the cooperation of favorable timing (AI), location (financial markets), and people (political environment). The US and the Federal Reserve may still have a chance to rebuild the credibility of the dollar and US Treasury bonds, but if they miss this opportunity, things could spiral completely out of control.

Chart 32: Based on previous experience with quantitative tightening, gold prices fell slightly in the initial stages of the tightening process.

Source: Wind, CICC Research Department

Chart 33: However, judging from the gold price performance throughout the entire process of quantitative tightening, quantitative tightening was not the decisive factor for gold prices.

Source: Wind, CICC Research Department

► The US needs to change course and embrace globalization again, or at least actively cooperate with its allies to regain trust and resolve its trust issues. This requires Trump to stop causing geopolitical disruptions. Market expectations for Trump's term are low, and further observation is needed after the midterm elections.

► The US economy needs to find a new foothold and achieve strong growth to address the issue of asset returns. This requires a significant upward shift in the US credit cycle, and AI is the most likely option to shoulder this responsibility. However, neither interest rate cuts nor fiscal expansion can completely solve the underlying problems of US debt.

► Government control measures. Controlling gold through administrative means, such as gold sales and punitive taxes, like the US government's open gold sales in 1975, will increase short-term volatility but will not solve the fundamental problem.

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