CICC: Gold exceeding $5,500 is an important watershed

Introduction: Is $5,500 the ceiling for gold, or the starting point of a revolutionary change?

In just one month at the beginning of the year, gold's performance has set multiple records: 1) The rate of increase has almost exceeded everyone's expectations. Although bullish sentiment on gold is mainstream in the market, a rise of 25% in just one month is unprecedented since the 1980s, and even for most gold bulls, it was likely unexpected; 2) After briefly exceeding $5,500 per ounce, it experienced a "full reduction," with a drop of over 10% in a single day, also unprecedented since 1984.

In the face of this dramatic surge and plunge, any point-based calculations seem pale and powerless because: 1) Gold prices have clearly surpassed simple fundamental dominance, so traditional gold calculation models like real interest rates have long since become ineffective; 2) The grand narrative of geopolitical and monetary system reconstruction, which has a greater impact, is difficult to provide a specific timeline for realization, instead allowing for a space of arbitrary speculation in the short term; 3) The recent surge in gold prices is largely driven by emotions and capital, making it difficult to grasp the rhythm.

Chart 1: Decoupling of gold and real interest rates after 2022

Source: Wind, CICC Research Department

Chart 2: The explanatory power of our constructed model of four factors—USD, real interest rates, uncertainty, and momentum—has recently declined for gold prices

Source: Bloomberg, Wind, CICC Research Department

These three points determine that it is difficult to balance direction and timing in gold price calculations, let alone the rhythm of fluctuations during the process, highlighting the value of "regular investment." For example, in our annual outlook published last November, "Following the Direction of Credit Expansion," we inferred the "threshold" of $5,500 per ounce based on the scale of existing gold equaling the scale of U.S. debt, but we did not anticipate reaching it in just three months. Some may say that as long as the direction is correct, timing is not that important; however, this is not the case. Imagine if this point were to be realized three years later instead of three months; who would be willing to heavily invest in the short term for a three-year distant opportunity? Not to mention whether one can hold on through the severe turbulence in the process.

In fact, alongside the rapid rise in gold, the sharply increased volatility and massive ETF inflows have already marked a "price tag" for the rise. The largest gold ETF globally, SPDR Gold ETF, has seen its holdings rebound to levels near those during the 2022 Russia-Ukraine conflict, and the correlation coefficient between ETFs and gold prices has risen to 0.98 over the past two years, a historical high, indicating that sentiment has reached a certain level of exuberance. As for the nomination of Waller, it merely played the role of a catalyst needed for the storm; otherwise, why would U.S. stocks, bonds, and the dollar not experience such significant turbulence? Chart 3: The 14-day RSI of gold reached 90, continuously staying in the overbought range

Source: Bloomberg, CICC Research Department

Chart 4: The volatility of gold has significantly increased, surpassing other assets

Source: Bloomberg, CICC Research Department

Chart 5: The correlation between gold prices and ETFs has reached the highest value since data collection began

Source: Wind, CICC Research Department

However, aside from the short-term sharp rises and falls, gold exceeding $5,500 per ounce is indeed an important watershed, marking that the total value of existing gold ($38.2 trillion) is comparable to the total outstanding amount of U.S. Treasury bonds ($38.5 trillion) [1], which is the first time since the 1980s. This indicates that the global structure anchored by the U.S. dollar, with the dollar based on U.S. Treasury bonds, has shown some signs of loosening.

Chart 6: We estimate that when the gold price rises to $5,500 per ounce, the scale of existing gold will be comparable to the scale of existing U.S. Treasury bonds...

Source: Wind, IMF, WGC, UCGS, CICC Research Department

Chart 7: ...the first occurrence since the 1980s

Source: Wind, IMF, WGC, UCGS, CICC Research Department

Gold, which has long been absent from the center of the daily operations of the international monetary system, has surprisingly risen to a scale comparable to U.S. Treasury bonds, which serve as the soil for the dollar and possess strong settlement and trading convenience. Is this the ceiling that gold can reach, or is it the starting point of an epoch-making change? A coincidental observation is that as soon as the gold price touches this level, it immediately faces a sharp correction, seemingly indicating the sensitivity of this position. The answer to this question depends on whether the U.S. can rebuild trust in U.S. Treasury bonds, and it also determines whether gold will face a "Volcker moment," which is a key issue we will discuss in this article.

1. What Drives the Rise in Gold? A Partial Replacement of Trust in the Dollar Triggered by Distrust in the U.S.

What factors are driving the current bull market in gold? Finding the reasons will help us better assess the future. To answer this question, let's first analyze several key factors that influence gold prices:

► Is it due to the weakening of the dollar? Yes, it is a major contributor, but its impact is not as significant as in the 1970s. The dollar dominates the pricing of commodities, and its weakening enhances the reserve value of gold. Since 2022, gold has entered a new bull market, rising 239% from $1,622 per ounce in September 2022, which corresponds to a 16% decline in the dollar index from a high of 114 in September 2022 to the current 96. Recently, the surprising policy "chaos" from Trump since the beginning of the year has heightened market concerns about escalating geopolitical risks, while also warming expectations for "de-dollarization," leading the dollar to fall to a nearly four-year low (《What Does Trump Want?》). However, the negative correlation between gold prices and the dollar in this bull market (R2 of 0.23 since 2022) is lower than that of the 1970s bull market (R2 of 0.57 in the 1970s).

Chart 8: The current bull market in gold since September 2022 corresponds to the weakening of the dollar

Source: Wind, CICC Research Department

Chart 9: The R2 of gold prices and the dollar since 2022 is 0.23

Source: Wind, CICC Research Department

Chart 10: The R2 of gold prices and the dollar in the 1970s is 0.57

Source: Wind, CICC Research Department

► Is it due to the decline in real interest rates? No. Real interest rates are a key component of the traditional pricing framework for gold, representing the opportunity cost of holding gold and reflecting its anti-inflation properties. However, real interest rates rose from 1% in September 2022 to a high of 2.5% in October 2023, while gold prices moved upward against this trend. Not to mention, since November 2025, the slope of gold prices has steepened again, but with the U.S. interest rate cut expectations fluctuating, real interest rates overall increased from 1.7% to 1.97%, which cannot explain this wave of gold price increases.

► Is it due to safe-haven demand under geopolitical risks? This is also an important factor. Since 2022, geopolitical risks have been frequent, and after Trump was re-elected president in 2025 and initiated "reciprocal tariffs," the uncertainty index of U.S. economic policy rapidly climbed, corresponding to a steepening slope in gold prices Chart 11: Since 2025, the U.S. Economic Policy Uncertainty Index has significantly risen, accompanied by a steeper upward slope in gold prices.

Source: Wind, CICC Research Department

► Is it driven by capital? Yes, capital inflows have 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 gold reserves of central banks in emerging countries globally 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 continue to increase their gold reserves, although the pace has slowed. 2) Private Sector: Correspondingly, the holdings of the SPDR Gold ETF (the world's largest gold ETF, accounting for 27%) increased from a low of 821 tons in March 2024 to the current 1,087 tons, and the correlation coefficient between the ETF and gold prices has also risen to a historical high over the past two years, proving that the recent rise in gold prices is largely related to speculative capital flows from the private sector.

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

Source: Wind, IMF, CICC Research Department

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

Source: Wind, CICC Research Department

A simple analysis shows that traditional inflation and safe-haven demand can explain part of the rise in gold, but cannot fully account for such a significant increase, which has led to a deviation of gold prices from traditional pricing models. The underlying and more critical driving force is the distrust towards the U.S. (specifically towards the Trump-era U.S.), leading to a partial substitution of the dollar's credibility, known as "de-dollarization," which is the "ultimate value" of gold. It is not difficult to see that in the past year or two, many geopolitical and policy risks have actually stemmed from the U.S. itself, making the dollar, which could originally serve as a safe haven, ineffective. A simple comparison is that during the latter half of the Biden administration from 2022 to 2024, although it faced a series of issues similar to the current ones, such as the Russia-Ukraine geopolitical situation, a weakening dollar, high U.S. debt, and rising inflation, the increase in gold prices was not as significant as during Trump's second term. From the starting point of this gold bull market in September 2022 to the election in November 2024, the gold price increased by only 50% over two years, while during Trump's first year in office, the gold price rose by over 100%

2. Issues with U.S. Treasuries? Rigid Debt Constraints, Endogenous Holding Structure, and Shrinking Relative Value

In addition to various policies by Trump damaging global trust, the question of whether U.S. Treasuries are still "safe" is a real reason prompting global monetary authorities and investment institutions to consider diversification needs. In other words, if a new president takes office in the future, can this trend be reversed? "No longer safe" does not mean defaulting, but rather a decrease in returns and a marginal decline in credit quality, specifically reflected in:

► Rigid Debt Constraints: Although U.S. Treasuries cannot default, their superlative status naturally demands greater safety. The interest coverage ratio of U.S. Treasuries (interest expenses/fiscal revenue) has continuously risen to a historical high of 18.5% since 2021, exceeding the 15% "warning line" set by agencies like S&P[2] and Moody's[3] when determining sovereign credit ratings. The increasing pressure to pay interest also means that in order to maintain debt sustainability, the fiscal discretion and flexibility of the U.S. are narrowing, crowding out other fiscal spending. In other words, the "quality of repayment" for U.S. Treasuries is declining.

► Endogenous Holding Structure: The change in the proportion of U.S. Treasuries held by foreign investors reflects the global demand intensity for U.S. Treasuries as a safe asset. This indicator has continuously declined from a high of 34% in 2014 to 23% in 2022, before slightly rising to the current 25%. This shift from global reserve assets to ordinary sovereign debt models indicates a weakening of the "extra credit demand" that U.S. Treasuries previously enjoyed.

► Shrinking Relative Value: The nominal value ratio of gold to U.S. Treasuries has risen from 0.35 in 2022 to the current 0.99. This continuous rise reflects a marginal decline in investors' preference for dollar sovereign credit assets, turning instead to physical gold for ultimate value hedging.

Chart 14: U.S. interest coverage ratio rises to a historical high of 18.5%, while the proportion held by foreign investors shows a downward trend

Source: Haver, CICC Research Department

Chart 15: The value of gold relative to U.S. Treasuries has risen from 0.35 in 2022 to the current 0.99

Source: Haver, CICC Research Department

In simple terms, from a fundamental perspective, high interest rates, high payments, and high leverage also raise concerns and criticisms regarding U.S. Treasuries.

3. The "De-dollarization" of Replacing U.S. Treasuries with Gold? Distinct "Two Camps," Some Increasing Gold Holdings, Others Still Increasing U.S. Treasuries

The distrust towards the United States and the issues surrounding U.S. Treasury bonds have jointly prompted a partial replacement of dollar credit, which is "de-dollarization" and also the core driving force behind the rise in gold prices. However, so far, "de-dollarization" has temporarily only manifested as a clear "bifurcation."

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

Chart 16: Countries such as China, Turkey, and India have increased their gold reserves the most since 2022

Source: Wind, CICC Research Department

Chart 17: Countries such as Japan, the UK, and Belgium have increased their U.S. Treasury bond holdings since 2024

Source: Wind, CICC Research Department

The price increase of gold can also be analyzed by region and ETF fund flows to show "differentiation": 1) Analyzing the price increase of gold since 2025 by time periods, as of January 29, the increase during the Asian session reached 33.5%, far higher than the 9.7% during the European session and 11.2% during the American session. Moreover, in this strong rise in gold prices since 2026, the main force has come from the Asian market, with increases of 11.4%, 0.3%, and 2.0% in the Asian, European, and American sessions respectively. 2) From the perspective of gold ETF fund flows by region, recent net inflows into gold ETFs mainly come from Asia and North America, with net inflows of $4.95 billion and $4.89 billion since 2026, while Europe has only seen inflows of $3.36 billion since 2026.

Chart 18: Since 2025, gold has cumulatively increased by 33.5%, 9.7%, and 11.2% in the Asian, European, and American sessions respectively

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

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

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

A closer look at the motivations for holding gold and U.S. Treasuries among major countries reveals significant differences. We constructed quadrants based on the proportion of gold in official foreign reserves exceeding 15% (global median) and the proportion of U.S. Treasuries in foreign reserves (as TIC data includes total holdings by foreign official and private sectors, some countries may have U.S. Treasuries exceeding 100%). Specifically: 1) High U.S. Treasuries + Low Gold: This includes Canada, Norway, the UK, Australia, Japan, Singapore, and other outward-oriented economies within the dollar system that require liquidity. Holding a high proportion of U.S. Treasuries can meet the frequent needs for cross-border trade settlements while also providing ammunition during exchange rate fluctuations. Among them, Canada and Norway hold no gold in their official foreign exchange reserves but have U.S. Treasuries equivalent to 372% and 242% of their foreign reserves, respectively. 2) Low U.S. Treasuries + High Gold: This group includes Germany and Italy, which have a deep historical reserve of gold, as well as Turkey, which has significantly increased its gold holdings to combat high inflation and domestic currency credit crises, and Russia and Poland, which are actively "de-dollarizing" for security reasons. 3) Low U.S. Treasuries + Low Gold: Represented by China, India, South Korea, Brazil, Mexico, and others, this group adopts a diversified allocation strategy, neither blindly relying on the dollar nor excessively hoarding gold; 4) High U.S. Treasuries + High Gold: The Netherlands and France exhibit a "double insurance" mechanism, holding a high proportion of U.S. Treasuries while still maintaining significant gold reserves. Compared to the end of 2023 before the surge in gold prices, Norway, Canada, Singapore, and South Korea significantly increased their allocations to U.S. Treasuries, while Turkey, Russia, Italy, Poland, Germany, and China noticeably raised their proportions of gold holdings.

Chart 20: Four Quadrants of Gold and U.S. Treasuries as a Proportion of Foreign Reserves

Data Source: Haver, CICC Research Department; Data is the average for 2025

Chart 21: Compared to the end of 2023 before the surge in gold prices, Norway, Canada, Singapore, and South Korea significantly increased their allocations to U.S. Treasuries, while Turkey, Russia, Italy, and others noticeably raised their proportions of gold holdings

Data Source: Haver, CICC Research Department

This indicates that "de-dollarization" has not yet risen to a globally accepted consensus; rather, it is more about "two distinct groups doing different things." After all, for most countries and economies still within the dollar system, there is no need to de-dollarize, and there are no better alternatives if they do. However, for the other group, facing risks such as sanctions and the weaponization of dollar reserve assets, de-dollarization is a reluctant yet necessary choice, making the increase in gold reserves an almost inevitable option. These demands have become the main driving force behind the price increases over the past few years But the current question is, since Trump's second term in 2025, with tariffs targeting the world, especially "allies," and various practices challenging the existing international order, coupled with the emergence of gold surpassing U.S. Treasury bonds as a key watershed, will this lead to the boundaries of this originally "clear-cut" camp becoming increasingly blurred? Will more markets belonging to the U.S. Treasury bond camp begin to shift towards gold?

IV. What does it mean for gold to surpass U.S. Treasury bonds? It is not an immediately realizable numerical node, but an important psychological watershed.

What changes will occur when gold continues to rise and surpasses the stock of U.S. Treasury bonds as a key watershed? Will it lead to more central banks in the middle ground considering a moderate diversification anchor, increasing their allocation to gold? As Trump continually challenges the existing international order and uses tariffs as a weapon, will traditional allies also begin to reassess their binding relationship with the U.S. dollar? With the U.S. continuously accumulating debt and interest expenses, coupled with bond yields and inflation that are difficult to effectively reduce, will ordinary investors holding U.S. Treasury bonds also worry about short-term returns and the sustainability of U.S. finances?

In this sense, gold surpassing U.S. Treasury bonds is not an immediately realizable mathematical node, but an important psychological watershed. For countries that are already "de-dollarizing," it goes without saying that they still need to increase their gold reserves, but for those still within the dollar system, especially the indecisive "centrists," once they believe that U.S. Treasury bonds are being downgraded from "the only global risk-free asset" to "a common high-risk sovereign asset," no longer special, unique, or absolutely safe, it could potentially create a self-fulfilling cycle of expectations. "De-dollarization" cannot be realized quickly, nor does it need to be immediately fulfilled, but confidence is always eroded little by little; sometimes, just having this doubt is enough to prompt some investors to start considering the need for diversified allocation, even though the process is slow.

Of course, we also need to view this process rationally. In the foreseeable future, the U.S. dollar and U.S. Treasury bonds are unlikely to be completely replaced. Undeniably, the dollar's status as a reserve currency remains solid, and it is more likely that there will be partial loosening of the dollar system, moving from singularity to diversity.

1) Reserve Share: As of the third quarter of 2025, the dollar still accounts for 57% of reserve currencies, far exceeding other currencies. However, when calculated as a proportion of global reserve assets, foreign official holdings of U.S. Treasury bonds (21.3%) have already fallen below gold (28.6%, based on the latest gold prices).

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

Source: IMF, CICC Research Department

Chart 23: Based on the latest gold prices, the proportion of gold in global reserve assets has exceeded the proportion of foreign official holdings of U.S. Treasury bonds in global reserve assets

Source: IMF, U.S. Department of the Treasury, CICC Research Department; Gold ratio calculated based on the latest gold price as of January 30.

2) International Payment Share: As of December 2025, the U.S. dollar accounts for 50.5% of global payments, far exceeding the second-place euro (21.9%). The global banking system (SWIFT) and most derivative transactions are anchored to U.S. Treasury bonds, creating a certain network effect, making the cost of switching systems extremely high.

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

Source: SWIFT, CICC Research Department

3) Trade Financing Share: As of December 2025, the U.S. dollar holds a 79.5% share in the global trade financing market, far exceeding the second-place renminbi (8.3%).

Chart 25: As of December 2025, the U.S. dollar holds a 79.5% share in the global trade financing market.

Source: SWIFT, CICC Research Department

4) There is no alternative (TINA) to the U.S. dollar. While gold is valuable, it does not generate interest. In situations where the credibility of the U.S. dollar is compromised, it can serve as a safe-haven and store of value asset, but it cannot replace the functions of credit currencies in interest rate liquidity supply and asset pricing. Moreover, due to physical quantity limitations, it cannot support the vast trade settlements globally. The euro market lacks sufficient depth, and the renminbi has not fully opened its capital account, both of which are insufficient to fully accommodate a $38 trillion asset pool. More importantly, the so-called "dollar hegemony" is not only based on the credit of the U.S. government and the economic strength of the U.S., but also on the military and technological power of the U.S. As long as these remain, the U.S. dollar credit system will have the confidence to continue.

Furthermore, the process of "de-dollarization" is also entirely possible to reverse or even see a turnaround, and the "old order" will not willingly allow itself to be replaced. For example, possible variables could arise from a new U.S. president changing course, re-embracing globalization, or at least actively cooperating with allies to regain trust; the U.S. economy finding new support to achieve strong growth; the U.S. emphasizing fiscal discipline while the Federal Reserve strongly curbs financial expansion, thereby reshaping trust in U.S. Treasury bonds as a safe asset through this short-term pain; or even implementing controls on gold, selling gold, and administrative measures for taxation, etc. In the 1980s, there was a situation where gold surpassed U.S. Treasury bonds, but ultimately, at the great cost of Volcker's aggressive interest rate hikes, trust in U.S. Treasury bonds was restored, securing the global hegemony of the dollar for the following forty years to the present day. **

V. Are there any historical experiences to draw from? The two surpassing periods in the 70s and 80s began with uncontrolled inflation and ended with aggressive interest rate hikes.

After the collapse of the Bretton Woods system in the 1970s, there were two periods when the scale of gold surpassed U.S. Treasury bonds: 1) April 1974 - April 1975 (lasting a total of 13 months, with gold peaking eight months after surpassing, an increase of 9%): This began with the devaluation of the dollar following the collapse of the Bretton Woods system and the high inflation brought on by the first oil crisis, and ended with the easing of inflationary pressures and the U.S. government's sale of gold to intervene in gold prices. 2) May 1979 - September 1983 (lasting a total of 53 months, with gold peaking seven months after surpassing, an increase of 244%): This began with the geopolitical conflicts triggered by the second oil crisis and stagflation, and ended with Paul Volcker's aggressive interest rate hikes in 1979.

Chart 26: Two longer periods in the 70s and 80s when the scale of gold surpassed U.S. Treasury bonds

Source: Wind, CICC Research Department

Chart 27: Ultimately ended with Volcker's significant interest rate hikes and a strong dollar

Source: Wind, CICC Research Department

1) The first period when the scale of gold surpassed U.S. Treasury bonds: April 1974, gold peaked eight months later, with an increase of 9%

The devaluation of the dollar following the collapse of the Bretton Woods system, combined with the high inflation and recession brought on by the first oil crisis, jointly propelled the scale of gold to surpass U.S. 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 devaluation of the dollar. In October 1973, OPEC announced an oil embargo, causing Brent crude oil prices to surge from $2.7 per barrel to $13 per barrel, leading to rising inflationary pressures in the U.S., negative real interest rates, and a recession that exacerbated the dollar's devaluation and gold's appreciation.

After the scale of gold surpassed U.S. Treasury bonds, the Federal Reserve's attitude towards interest rate hikes was not decisive. Rising oil prices pushed the CPI to continue rising year-on-year in 1974, peaking at 12.3% in December, while real interest rates fell to -4.9%. However, under stagflation pressures, the Federal Reserve shifted to an accommodative stance early on, with the federal funds rate beginning to decline in July 1974, indicating that monetary policy failed to make the "necessary contributions" to curb inflation and gold prices. The gold price rose from $168 per ounce when the scale of gold surpassed U.S. Treasury bonds in April 1974 to a peak of $184 per ounce in February 1975.

How to reverse this? 1) Easing supply-side inflationary pressures: Starting in January 1975, oil prices turned negative year-on-year, leading the U.S. CPI to enter a two-year downward period. 2) Direct government intervention in the gold market: In December 1974, the U.S. government announced the lifting of the ban on residents holding gold, which the Federal Reserve interpreted as a signal that "the government decided to end the monetary function of gold." Subsequently, starting January 6, 1975, the U.S. government began publicly auctioning its gold reserves Increasing market supply has curbed the upward trend of gold prices.

However, the Federal Reserve has not completely resolved the inflation issue. According to research from the Philadelphia Fed, the Fed's hesitance during this period reinforced inflation expectations, which ultimately reflected in higher inflation data; although the CPI year-on-year declined from 1975 to 1976, it remained above 5.0%. This also set the stage for the more stubborn inflation and greater increases in gold prices in 1979-1980.

2) The second gold surge surpasses U.S. Treasury bonds: In May 1979, seven months later gold peaked with a 244% increase

The escalation of geopolitical conflicts during the second oil crisis and stagflation led to gold once again surpassing U.S. Treasury bonds in 1979. Starting in the second half of 1978, the situation in Iran gradually spiraled out of control, culminating in the Iranian Islamic Revolution in early 1979, which triggered the second oil crisis. 1) Geopolitical conflict: Unlike the first oil crisis where OPEC actively imposed embargoes and raised prices, the uncertainty of the internal political order in oil-producing countries reached a peak this time, providing more momentum for the rise in gold prices. 2) Stagflation: Brent crude prices skyrocketed from $12 per barrel to $42 per barrel, with supply-side pressures once again pushing inflation upward and real interest rates turning negative. The increase in gold prices was even more pronounced, soaring from $247 per ounce in May 1979 to a peak of $850 per ounce in January 1980.

Shortly thereafter, Volcker took strong measures to combat inflation. In August 1979, Volcker became the chairman of the Federal Reserve. Fortunately, although the U.S. was suffering from high inflation at the time, fiscal pressure was not significant, and even high inflation diluted some of the pressure. The ratio of U.S. Treasury debt to GDP gradually declined from 1978 to 1979, standing at only 30-31% when Volcker took office (vs. an average of 121.5% in 2025); although the government's interest coverage ratio rose to 9.2% in 1979, the increase was manageable compared to 7.5% in 1970, and significantly lower than the nearly 20% average in 2025. This provided considerable space for monetary policy tightening. In October 1979, Volcker announced that the policy target would be directly shifted to "money supply," meaning that the rise in the federal funds rate would be unconstrained.

What led to the reversal? Volcker's aggressive interest rate hikes combined with the "Reagan economic cycle" helped the U.S. emerge from stagflation and significantly strengthened the dollar. On one hand, under Volcker's "extreme" monetary tightening, the effective federal funds rate soared from 11.4% before October 1979 to 19.1% in January 1981, and the CPI year-on-year began to cool after peaking in April 1980, driving real interest rates up from a low of -4.6% in June 1980 to positive territory by November of that year. On the other hand, after President Reagan took office in 1981, a series of tax cuts and deregulation policies led the U.S. economy to prosper again, with the dollar rebounding from a low of 85 in 1980 to a high of 180 before the Plaza Accord in 1985. Gold prices gradually retreated from July to September 1980, but due to the previous significant increase in gold prices, it wasn't until 1983 that the scale of U.S. Treasury debt surpassed that of gold. Volcker's tough monetary policy successfully broke the self-fulfilling mechanism of inflation[8], and there has not been a long-term situation where "the nominal scale of gold exceeds that of U.S. Treasury bonds" since then. **

VI. The Current "Dilemma" in the U.S.: Choosing Two from Low Inflation, Low Interest Rates, and Dollar Hegemony; Reshaping Trust in U.S. Treasuries is Difficult Without "Cost"

It is not difficult to see that after the scale of gold surpassed U.S. Treasuries in the 1980s, it was at the enormous cost of Paul Volcker's aggressive interest rate hikes, which "hurt a thousand enemies but damaged oneself eight hundred," that inflation was anchored, trust in U.S. Treasuries was reshaped, and the subsequent forty years of global dollar hegemony was secured.

For the U.S. government and the Federal Reserve, a current reality "dilemma" is that they want low inflation, low interest rates to reduce debt costs, and to maintain the dollar's hegemonic position without being replaced. Among these three, Volcker sacrificed the second one with strong interest rate hikes back then, but unlike that time, although the inflation level is much lower now, facing a debt level and interest payment pressure that is significantly larger than before, anchoring inflation and reshaping trust in U.S. Treasuries through substantial interest rate hikes is not an easy task: 1) The current U.S. Treasury debt stands at $38.5 trillion, accounting for 122% of U.S. GDP, far higher than the $8 trillion in 1979, which accounted for 31% of GDP. 2) The current interest coverage ratio (the ratio of interest expenses to fiscal revenue) in the U.S. is 19.8%, much higher than the 9.2% when gold surpassed U.S. Treasuries in 1979.

Chart 28: Current U.S. Debt Pressure is Much Greater than in the 1970s

Source: Haver, CICC Research Department

An "ideal" state for the U.S. and the Federal Reserve would be: 1) A new variable suddenly appears to solve inflation, such as AI significantly improving production efficiency, leading to substantial wage and commodity deflation; 2) At this time, the Federal Reserve could achieve financial repression by reducing short-term interest rates and moderately increasing long-term rates, enhancing the attractiveness and trust in U.S. Treasuries. This is precisely the core proposition of the newly nominated Fed Chair Kevin Warsh, so to some extent, the significant drop in precious metals after Warsh's nomination is a prelude to the "Volcker moment."

Chart 29: Newly Nominated Fed Chair Warsh Advocates for Rate Cuts and Balance Sheet Reduction

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

However, the actual process may face numerous challenges and is not as simple as imagined, for example: 1) How much can AI's efficiency improvement contribute? Can it effectively drive inflation down? 2) Would the Fed's balance sheet reduction not affect financial liquidity and trigger market turmoil, especially considering the upcoming midterm elections, making them cautious? 3) Would balance sheet reduction not increase the financing costs of U.S. Treasuries? The weighted maturity of existing U.S. Treasuries is 5.8 years, less than the 8.8 years weighted maturity of Treasuries held by the Fed. While it is indeed possible to "sell long to reduce short," the process may not be so "smooth," so does the Fed need to initiate Yield Curve Control (YCC) to stabilize long-term rates? But if more short-term bonds are sold, wouldn't that contradict interest rate cuts? 4) If interest rates are cut too much, will inflation expectations reignite? Is this beneficial for gold? 5) If ultimately faced with a choice between maintaining debt or maintaining the exchange rate, the exchange rate is undoubtedly the option with the least cost. While a proactive and significant devaluation like the "Plaza Accord" of the 1980s may not be realistic, moderately increasing inflation tolerance and slightly depreciating the dollar can effectively alleviate the pressure of existing debt (using cheaper future money to repay currently more expensive money), but at the cost of undermining long-term trust in U.S. Treasuries, ultimately benefiting gold.

Chart 30: The existing U.S. debt is mainly composed of medium- to long-term bonds, with short-term bonds accounting for only 21.6%

Source: Haver, CICC Research Department

Chart 31: The U.S. Treasuries held by the Federal Reserve are mainly medium- to long-term bonds

Source: Haver, CICC Research Department

7. Can we now determine if this is the end of the gold trend? Not yet, the U.S. needs to pay a high price to resolve the trust issues regarding the U.S. and U.S. Treasuries

Returning to the question at the beginning of this article, is $5,500/ounce the ceiling that gold can reach, or is it the starting point of a new era? We believe that to completely end this trend in gold, we need to see the U.S. start to pay a high price to resolve the "three out of two" dilemma of low inflation, low interest rates, and dollar hegemony, and to rebuild confidence in U.S. Treasuries and even in the U.S. itself.

But how much can the extent be? To be frank, we cannot provide a definitive answer. In the last two instances of surpassing, one rose by 9%, while the other doubled. However, one thing is certain: gold has entered an "uncharted territory" not seen for decades, and the "old order" cannot be allowed to be replaced (will the newly nominated Federal Reserve Chairman Waller become the new era's Volcker?). Therefore, it will also be accompanied by intense games and turbulence. For investors, while long-term trends are certainly important, they are too grand; short-term fluctuations are grounded and directly related to positions, once again highlighting the value of "regular investment."

Referring to the experiences of the 1970s, a significant correction in gold prices requires the following conditions, and the end of the trend must address issues of trust in U.S. Treasuries, trust in the U.S., and asset returns on three levels:

► The U.S. emphasizes fiscal discipline, and the Federal Reserve strongly suppresses financial expansion to resolve the trust issue in U.S. Treasuries. If the combination of Waller's interest rate cuts and balance sheet reduction can be successfully implemented, it would be a new attempt worth close attention. The significant drop in gold on January 30 was, to some extent, a psychological rehearsal for the "Volcker moment," representing a potential shift in thinking. Looking solely at the impact of balance sheet reduction itself is not that significant (gold prices fell slightly by 0.4% and 1.9% respectively one month after balance sheet reductions in 2017 and 2022) But this path requires strong willpower, as well as the right timing (AI), favorable conditions (financial markets), and harmony (political environment). The United States and the Federal Reserve may still have a chance to reshape the credibility of the US dollar and US Treasury bonds, but if this opportunity is missed, it may lead to complete loss of control.

Chart 32: Referring to previous experiences of balance sheet reduction, gold slightly declined in the early stages of balance sheet reduction.

Source: Wind, CICC Research Department

Chart 33: However, from the overall performance of gold prices during the entire balance sheet reduction process, balance sheet reduction is not a decisive factor for gold prices.

Source: Wind, CICC Research Department

► The United States needs to change course and re-embrace globalization, or at least actively cooperate with "allies" to regain trust and address the issue of trust in the US. This requires Trump to stop causing geopolitical disturbances; market expectations during Trump's term are very low, and further observation can be made after the midterm elections.

► The US economy needs to find a new pivot to achieve strong growth and address the issue of asset returns. This requires a significant upward shift in the US credit cycle, with AI being the most likely option to take on this responsibility. However, neither interest rate cuts nor fiscal expansion can fundamentally resolve the underlying issues of US Treasury bonds.

► The government needs to implement control measures. This includes controlling gold, such as administrative measures like selling gold and punitive taxes. For example, if the US government openly sells gold as it did in 1975, it would increase short-term volatility but not solve the fundamental problem.

Risk Warning and Disclaimer

Markets are risky, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk.