GUOTAI JUNAN I: Why are gold and U.S. Treasuries rising together amid the frenzy of the dollar "devaluation trade"?

According to the Zhitong Finance APP, GUOTAI JUNAN International released a research report stating that over the past 12 months, gold prices have soared above $4,300, while the US dollar exchange rate has continued to weaken during the same period, leading to increasingly heated discussions in the market about "devaluation trades." However, outside the frenzy of "devaluation trades," the US Treasury market, which should be most sensitive to inflation risks, has remained unusually calm, with its core long-term inflation expectation indicator still firmly anchored around the Federal Reserve's 2% target. From the perspective of asset price dynamics, the logic behind the rise in gold essentially reflects the market's "vote of no confidence" in the future credit of the US dollar. In contrast, the performance of US Treasuries can be seen as a "vote of confidence" in policy credibility. The core game in the current market revolves around betting on which economic signal will ultimately dominate the Federal Reserve's decision-making—whether to choose to cut interest rates in response to a potential recession or to be forced to tighten policy to curb inflation. This is not only a divergence point in the pricing logic of gold and US Treasuries but will also determine the final direction of major asset classes in the short term. GUOTAI JUNAN International's main points are as follows: Over the past 12 months, gold prices have soared above $4,300, while the US dollar exchange rate has continued to weaken during the same period, leading to increasingly heated discussions in the market about "devaluation trades." The logic behind the rise in gold, in addition to concerns about the US potentially addressing its massive debt problem through deficit monetization, is also influenced by heightened risk aversion due to global trade frictions and geopolitical tensions. After the Federal Reserve restarted its interest rate cut cycle, the appeal of gold as a non-yielding asset has relatively increased, and the re-evaluation of US dollar credit supports the continuous rise in gold prices. From the perspective of the US dollar, the dollar index has fallen nearly 10% from its peak at the beginning of the year, and for the past three months, it has mostly fluctuated within a low range. How the balance of bullish and bearish forces will play out next has become the most closely watched driving factor for the market's "devaluation trades." We believe that under multiple factors, the US dollar will face resistance in continuing to rebound upwards, but the market's current pricing of devaluation is already quite sufficient. If we compare the trend of the dollar index during Trump's two presidential terms, the probability of the dollar continuing to fluctuate upwards is relatively high. However, outside the frenzy of "devaluation trades," the US Treasury market, which should be most sensitive to inflation risks, has remained unusually calm, with its core long-term inflation expectation indicator still firmly anchored around the Federal Reserve's 2% target. Looking ahead, the simultaneous escalation of domestic and external tensions in the US, combined with the rising expectations of Federal Reserve interest rate cuts, will provide investors with sufficient reasons to turn to safe-haven assets, and the implied low point of the federal funds rate in the market may reach a new low within the year. From the perspective of asset price dynamics, the logic behind the rise in gold essentially reflects the market's "vote of no confidence" in future monetary credit, especially in US dollar credit; in contrast, the performance of US Treasuries can be seen as a "vote of confidence" in policy credibility. Therefore, how gold, the US dollar, and US Treasuries will play out under the interplay of multiple factors requires investors to clearly distinguish between long-term risks and short-term realities. The core game in the current market revolves around betting on which economic signal will ultimately dominate the Federal Reserve's decision-making—whether to choose to cut interest rates in response to a potential recession or to be forced to tighten policy to curb inflation? This is not only a divergence point in the pricing logic of gold and U.S. Treasuries, but it will also determine the ultimate direction of major asset classes in the short term