The sharp rally in precious metals, with gold surpassing $5,000 and silver up over 50% this year, has revived investor focus on the so-called "debasement trade." This strategy bets that major governments, particularly the U.S., will intentionally devalue their currencies to manage high debt burdens, thereby boosting the appeal of hard assets like gold.

However, Deutsche Bank macro strategist Henry Allen argues this premise is flawed, drawing on historical lessons spanning more than five centuries. In a client note, Allen detailed how deliberate currency debasement has repeatedly led to inflationary spirals and political backlash, making sustained devaluation an unlikely policy path.

Historical Warnings from Tudor England and Imperial Rome
Allen pointed to two definitive examples:

• 1544, England: King Henry VIII reduced the precious metal content in coins to fund government spending, replacing them with cheaper base metals like copper. This led to rampant inflation, and the policy was reversed by 1551 after public outrage.

• 64 A.D., Roman Empire: Emperor Nero initiated a gradual reduction of silver in the denarius to raise revenue without raising taxes. The practice continued until coins contained just 5% silver, contributing significantly to the economic instability that plagued the late Empire.

"A key lesson in both was that the debasement didn’t start as a huge and sudden shock," Allen wrote. "It was a gradual process... repeated to the point where inflation became widespread." He emphasized that inflation is politically toxic, as evidenced by the recent global electoral ouster of incumbent governments following the post-pandemic price surge.

Current Market Signals Contradict Debasement Narrative
Beyond history, Allen highlighted that contemporary market indicators do not support the thesis of an imminent, unchecked inflationary devaluation.

• Inflation Expectations: U.S. and European 30-year inflation swaps, key derivatives for gauging long-term price trajectories, remain stable.

• Bond Yields: Treasury yields have not spiked, suggesting bond markets are not pricing in a sudden loss of faith in currency value.

Allen contends that traders betting on sustained debasement are making a wager that modern governments will tolerate the severe public backlash that has historically followed such policies. "Inflating away debt is more difficult than it looks, having been met with strong political resistance given inflation’s unpopularity," he stated.

The strategist's analysis suggests the current commodity rally may be overheating on a narrative that both history and current market mechanics challenge.