This episode reveals that the "debasement trade" is not a temporary market anomaly but a permanent secular trend, forcing a 100-year reset where hard assets like gold and Bitcoin are re-emerging as the ultimate stores of value in a world of unsustainable sovereign debt.
The Illusion of Wealth: Denominating Assets in Dollars vs. Hard Money
- Luke Gromen opens by analyzing a chart that tells the story of modern wealth creation. When assets like the S&P 500, NASDAQ, and home prices are measured in US dollars, they appear to be in a massive boom. However, when denominated in gold, these same assets are flat to negative, revealing that real wealth is stagnating. Denominated in Bitcoin, the picture is even starker, showing a significant bleed.
- This discrepancy highlights the core issue: it's not that assets are booming, but that the currency used to measure them is being systematically devalued.
- Gromen attributes this to sovereigns needing negative real rates to service their debt, a situation that forces them to print money. He points to programs like the BTFP (Bank Term Funding Program)—a Federal Reserve emergency lending program to provide liquidity to banks—as a recent example of this money creation, regardless of official labels.
- "How often do we hear what's the use case of gold? Gold isn't used for anything. Bitcoin isn't used for anything. When sovereigns find themselves in a position where they need to have negative real rates to keep their debt nominally money good. This is what happens."
Not a Trade, But a Secular Trend
- The conversation challenges the consensus view that currency debasement is a short-term "trade" that will eventually revert to the mean, similar to the 1970s inflation that was tamed by Fed Chair Paul Volcker. Gromen argues this comparison is flawed because the US fiscal situation today is fundamentally different and far more precarious.
- He notes that if the Fed raised rates to even 6% today, it would collapse the Treasury market, housing, and stocks—a scenario that has been empirically tested with market dysfunction occurring well below 5% rates.
- Gromen draws a parallel between the current US fiscal situation and that of Brazil around 2000, a concept known as fiscal dominance, where a country's debt and deficit situation forces the central bank to prioritize financing the government over controlling inflation. This comparison was first made by former Dallas Fed economist John Welch.
- Strategic Implication: Investors should stop viewing this as a temporary trade. The correct behavior is not to sell rallies but to buy dips in hard assets, as the underlying trend is a permanent debasement of fiat currency.
The Flippening: Gold Overtakes Treasuries in Foreign Reserves
- A pivotal chart is discussed, showing that as of 2025, gold has surpassed US Treasuries as the dominant reserve asset held by foreign central banks for the first time in 30 years. Gromen views this as a hugely significant, potentially monumental, geopolitical shift.
- This trend is unlikely to reverse unless two improbable events occur:
- The US reverses its policy and becomes comfortable with China manufacturing critical components for its military.
- China and Russia abandon their de-dollarization strategy and return to stockpiling US Treasuries at negative real rates.
- Since the odds of either scenario are near zero, the trend of central banks accumulating gold at the expense of Treasuries is set to continue, marking a new equilibrium in global power dynamics.
A Historical Perspective: Why Treasuries Dominated for 30 Years
- The discussion explores why central banks shifted from gold to Treasuries in the mid-1990s. This was driven by a unique confluence of historical factors:
- US Triumphalism: The collapse of the USSR and the end of the Cold War created a unipolar moment of American dominance, captured by Francis Fukuyama's "The End of History" thesis.
- Fiscal Strength: From 1997 to 2001, the US ran fiscal surpluses, making the Treasury market a smaller, more stable instrument.
- The 1997 Asian Financial Crisis: This event prompted nations, particularly China, to aggressively build up foreign exchange (FX) reserves to avoid a similar crisis. At the time, buying Treasuries was the only viable option, as buying gold would have been seen as a move against the US.
The Great Divide: Who Should Be Alarmed by Gold's Rise?
- Gromen analyzes the nervous laughter from figures like Mark Cuban and Andrew Ross Sorkin regarding gold's price surge. He frames the reaction as a divide between two camps within the US:
- The Wall Street/Washington Camp: This group, which benefited from offshoring the US industrial base to support the bond market, is alarmed by gold's rise. It signals the end of an economic regime that favored their interests.
- The Industrial Reshoring Camp: This group, which includes Gromen, the BRICS nations, and those who want to rebuild the US defense industrial base, sees a higher gold price as necessary. It helps inflate away debt and puts the US on a more sustainable competitive footing with China.
- He notes the shifting perspective, citing Jamie Dimon's recent comment that he "could see gold at $5,000 or $10,000," suggesting that even the financial elite are beginning to understand this new reality.
The Implied Price of Gold: Closing the Currency Reserve Gap
- Another chart reveals that in 1970, gold reserves were equal to currency reserves. Today, currency reserves are six times larger than gold reserves. Gromen argues this gap will close over time, driven by relentless central bank buying and a revaluation of gold's price.
- He dismisses the argument that there isn't enough gold to serve as a reserve asset, stating, "Gold's price can rise infinitely. There's plenty of gold. It's just a question of price."
- Based on this rebalancing, Gromen projects a potential gold price of over $20,000 per ounce.
- This trend is reinforced by the fact that global central banks have effectively stopped accumulating Treasury reserves since 2014, following the weaponization of the dollar system against Iran and Russia.
Moving Towards a Gold Standard? Or Something Else?
- Gromen clarifies that the world is not moving back to a traditional gold standard, where currency is pegged to a fixed price of gold. Instead, it's moving toward a system resembling what economist John Maynard Keynes proposed as Bancor—a neutral reserve asset that fluctuates in value against all currencies to balance global trade.
- In this system, gold acts as the neutral asset. As the US runs deficits, the dollar falls against gold. This strengthens other currencies (like the yuan) relative to the dollar, which is precisely what US policymakers have wanted China to do for decades.
- A higher gold price also improves the balance sheets of Chinese consumers, encouraging domestic consumption and further rebalancing the global economy.
The Risk of a Disorderly Transition
- The conversation shifts to whether this monetary reset will be an orderly transition or a chaotic one. Gromen is increasingly pessimistic, arguing that the window for a smooth "big bath" accounting—where the government writes down its bad debt and resets the system—is closing.
- The primary complicating factor is the rapid arrival of AI, which he describes as an "exponential deflationary technology."
- AI will cause significant white-collar job disruption, hurting tax receipts and worsening the fiscal picture. This will create a feedback loop where the government must print an ever-increasing amount of money to keep the banking system solvent.
- AI Investor Insight: The deflationary shock from AI will accelerate the timeline for a monetary crisis. This makes the need for exposure to hard, debasement-proof assets like Bitcoin and gold more urgent than many investors realize.
The Central Bank Gold Game: Who Really Holds What?
- The discussion delves into the opaque world of central bank gold holdings. While the US officially holds the most gold (8,100 tons), Gromen asserts that China's official figure (around 2,200 tons) is a "joke" and that their actual holdings are far higher.
- China's strategy is a form of "hide your strength and bide your time." They underreport their holdings to avoid spooking the market, which would drive up the price and allow Western traders to front-run their purchases.
- This secrecy is a key part of the geopolitical game, as officially surpassing the US in gold reserves would be a major political statement.
The US Ace in the Sleeve: Revaluing Gold Reserves
- Gromen explains a powerful but politically charged tool the US could use: revaluing its official gold reserves. The US Treasury carries its gold on the books at $42.22 per ounce, a price set in 1971.
- The Treasury has the authority to order the Federal Reserve to revalue this gold to the current market price.
- This act would mechanically create a massive deposit in the Treasury General Account (TGA). At a price of $20,000/ounce, this would generate $5 trillion, enough to buy back the entire long end of the Treasury market.
- This move would effectively end the current dollar reserve system and establish gold as the new primary reserve asset. It has not been done yet due to the immense political implications and the need to exhaust other, less drastic options first.
Navigating Gold Investments: Physical vs. Paper Gold
- For investors looking to gain exposure, Gromen breaks down the different types of gold and their associated risks:
- Paper Gold (ETFs like GLD): These are claims on gold held in vaults, usually in London. While the ETFs are fully backed, the primary risk is counterparty and political. In a severe crisis, governments could declare force majeure and cash-settle holders at a previous day's price, effectively confiscating the upside.
- Unallocated Gold: This is a credit instrument offered by banks and represents the highest risk. It is a claim on a general pool of gold, making the holder a general creditor of the bank in case of failure. The market is estimated to be fractionally reserved by a factor of 20x to 100x.
- Physical Gold: This is the safest option, as it removes counterparty risk. Gromen recommends holding physical coins or using private, non-bank vaults to avoid the risks associated with the traditional banking system.
The Bitcoin Question: Will the Debasement Trend Trickle Down?
- Gromen believes the debasement trend will ultimately benefit Bitcoin. He sees a rising probability of a future where the monetary system splits along geopolitical lines.
- A Potential Scenario: The East (China, Russia) could anchor its system to gold, while the West (US and its allies) could pivot to Bitcoin as its hard money anchor.
- He points to the US government's behavior as a key indicator. They seize vast amounts of Bitcoin but, unlike other seized assets, they do not sell it. This "dog that doesn't bark" suggests they view it as a strategic reserve.
- Crypto Investor Insight: While central bank adoption of Bitcoin may take time, the underlying macro forces are creating an environment where a non-sovereign, digital hard asset becomes increasingly attractive. The US government's implicit strategy around stablecoins and its hoarding of seized Bitcoin point toward a future with a much higher price.
Market Cycles and Catch-Up Trades: Gold vs. Bitcoin in the Short Term
- Addressing the crypto-native investor mindset, Gromen acknowledges the historical pattern where "gold goes, then Bitcoin goes." He is open to the possibility of a Bitcoin catch-up trade following gold's recent surge.
- However, he tempers this by noting that we are also approaching a point in Bitcoin's four-year cycle that has historically been weak.
- His base case, though not held with high conviction, is that it's more likely Bitcoin will chase gold higher, but he remains open to a period of short-term weakness depending on macro events.
A Portfolio for the 100-Year Reset
- Gromen concludes with actionable advice for constructing a portfolio designed to weather this generational monetary shift, based on the model of Jacob Fugger, history's wealthiest individual.
- 25% Gold & Bitcoin: The allocation between the two depends on age and risk tolerance (younger investors might favor more Bitcoin).
- 25% Productive Real Estate: Assets like timberland, farmland, or rental properties.
- 25% Equities: Focused on industrials and commodity-related assets that benefit from reshoring and inflation.
- 25% Cash: Provides a volatility buffer and the optionality to buy dips in other asset classes.
- He strongly advises against holding long-term government bonds, as they are the primary instrument of financial repression in this environment.
Conclusion
This episode argues that the ongoing debasement is not a temporary trade but a structural, multi-decade trend driven by unsustainable debt. For Crypto AI investors, this accelerates the timeline for a monetary reset, making hard assets like gold and Bitcoin essential for wealth preservation in the face of inevitable currency devaluation.
