The Game Theory of US Dollar vs. Gold

Gold Prices and US Dollar Liquidity

So far in 2025, the international gold price has risen by over 51%. According to the World Gold Council, 2025 marks the largest annual gain in gold prices since 1979. In just the first three weeks of October, the gold price surged from $3,800 to a historic peak of $4,390 per ounce.

Analysis:

As the anchor of equilibrium in the allocation of global major asset classes, gold is pricing in the market''''''''s future uncertainties, including potential Federal Reserve rate cuts, US tariff policies, geopolitical conflicts, and uncertainties surrounding the credibility of the US dollar. Heightened geopolitical shifts, increased global economic uncertainties, trade disputes, expectations of Fed rate cuts, and gold purchases by central banks worldwide are key drivers behind this rally in gold. The inherent scarcity of gold naturally endows it with safe-haven attributes.

2. Price Support
In the short term, events such as the U.S. government "shutdown" since October have been a major driver behind the sharp rally in gold. In the medium to long term, expectations of a Federal Reserve interest rate cut and continued gold purchases by central banks provide fundamental support for gold prices.

3. Unlimited Price Rise Unlikely
It is noteworthy that the preliminary consensus reached in the U.S.-China economic and trade consultations in Kuala Lumpur led to a shift of funds from safe-haven assets like gold to riskier currencies. This was the core trigger for gold prices falling below $4,000 on October 27. On that day, spot gold in London recorded an intraday maximum decline of 2.8%. The rapid cooling of safe-haven demand temporarily disrupted the short-term correlation between gold prices and the U.S. dollar, indicating that gold prices cannot sustain an endless rise.

4. Global Currency Function Remains Despite Massive U.S. Dollar Liquidity
Data released by the U.S. Treasury Department on October 22 shows that the total U.S. national debt has exceeded $38 trillion, compared to approximately $13 trillion in 2010. Against this backdrop, Bitcoin hit a record high, surpassing $21,800 per coin—a phenomenon also driven by excessive U.S. dollar liquidity.

The expansion of the Federal Reserve’s balance sheet reflects the growth rate of its base money supply:

• 2008: Approximately $0.9 trillion

• 2014: $4.2 trillion

• August 2019: $3.75 trillion

• Early 2020: Back to $4.2 trillion

• December 2020: $7.2 trillion

It is estimated that by 2025, the Federal Reserve’s balance sheet could reach around $16 trillion.

With the U.S. government’s fiscal space increasingly constrained, it relies on monetary policy to mitigate economic risks. If other currencies expanded at a similar pace, they would likely face a collapse in credibility. However, the U.S. dollar, by virtue of its dominant role in foreign exchange reserves and global trade settlement, continues to provide the foundational order for the world economy. Even with its flaws, the global community—including China—prefers to maintain the current system, as "an imperfect order is better than no order." At present, the renminbi is not yet fully prepared to assume the responsibilities of a global currency.

Sino-US Trade Negotiations
The US initiated a Section 301 investigation into China''''''''s shipbuilding industry and imposed restrictions on Chinese-built vessels docking at American ports. China''''''''s corresponding countermeasures are defensive actions taken in response. In mid-October, US Trade Representative Besant publicly criticized Li Chenggang, Vice Minister of China''''''''s Ministry of Commerce and a key member of the Sino-US trade negotiations, as "disrespectful" and difficult to work with during the ongoing talks. On October 26, trade representatives from both countries held a meeting in Kuala Lumpur, Malaysia, where they announced that they had reached a framework agreement on tariffs and other issues. China is considering delaying the implementation of restrictions on the export of rare minerals and resuming purchases of soybeans from the United States to avoid significant tariff increases on Chinese goods by the US.

Commentary: The US stance is firm, while China remains resolute in safeguarding its interests.

1. During President Trump''''''''s second term, a global trade war was launched, with a particular emphasis on complete decoupling from China. Both countries are engaged in mutual constraints—the US has imposed restrictions on China in areas such as advanced semiconductor manufacturing (e.g., lithography machines) and continues to pressure for additional tariffs, while China has suspended imports of US soybeans and implemented new rare earth export policies.

2. In the short to medium term, the two sides must achieve phased results in trade negotiations. The US can no longer bear the pressure of high domestic inflation, as lower inflation is necessary to facilitate interest rate cuts, with the dual goals of reducing government debt interest burdens and stimulating domestic investment. Against the backdrop of weak domestic demand in China, it also temporarily wishes to avoid completely losing the US market.

3. In the long run, the possibility of complete decoupling between China and the US is not insignificant. China''''''''s rapid rise in comprehensive national strength has raised US concerns about losing its global hegemony, prompting it to employ all possible means to suppress China. Both countries are racing to address their own weaknesses: the US aims to bring manufacturing back home and globally collaborate on the development of key minerals, while China''''''''s new 15th Five-Year Plan emphasizes vigorously promoting technological breakthroughs, expanding domestic demand, and jointly building the Belt and Road Initiative to mitigate external market risks.