Inherent tension in the triangular relationship of US debt, the US dollar, and gold

In the first half of 2026, U.S. Treasury Secretary Scott Bessent emphasized on CNBC and other public platforms that the dominance of the U.S. dollar is crucial to the United States. The Trump administration has promoted Venezuela's return to the dollar system through a series of policies, denominated Iranian trade in dollars, and expects that Russia may return to the dollar system after the Russia-Ukraine conflict ends. These measures aim to strengthen the dollar's core status as a global trade and reserve currency. According to data from the Bank for International Settlements, the dollar still accounts for nearly 90% of global foreign exchange transactions.

The core of dollar hegemony lies in its function as the "center of the global monetary system." The U.S. maintains this status through sanctions, capital flow management, and diplomatic leverage. Bessent noted that the U.S. has "the ability to correct errors" and should actively leverage its advantages to cooperate with allies while putting pressure on non-aligned entities. This strategy reflects the proactive defensive stance of the U.S. in the face of de-dollarization trends. China, as a major driver of gold purchases and diversified reserves, is seen as a key challenger.

Dollar Index Dynamics and Recent Market Intervention

In early 2026, the U.S. Dollar Index (DXY) once approached a key support level near 96, sparking concerns about a dollar bear market. Subsequently, against the backdrop of Bessent's related policy signals, the announcement that Kevin Warsh would replace Jerome Powell as Federal Reserve Chair, and a significant pullback in gold and silver prices, the dollar rebounded. As of the end of June 2026, DXY was hovering around 101, a notable recovery from its early-year low.

During the same period, gold prices fell from highs to around $4,000 per ounce, and silver prices touched the $54-60 per ounce range, marking a significant correction in 2026. Analysts believe the pullback was partly due to the short-term suppression of risk assets from geopolitical events (such as reports related to the U.S.-Iran conflict) and the collective policy efforts of the U.S. maintaining a strong dollar to attract capital inflows. The single-day sharp decline in gold and silver in late January was seen as the most severe since the dollar broke away from the gold standard in 1971, highlighting the market's sensitivity to dollar defense measures.

These events were not isolated. Bessent participated in the 1992 attack on the British pound by Soros, and his background gives him a strategic advantage in defending the dollar. The U.S. faces about $10 trillion in debt financing needs in 2026 (including $8 trillion in rolling over old debt and $2 trillion in new debt). A weaker dollar would significantly raise financing costs. Therefore, maintaining the dollar's attractiveness has become a priority for fiscal policy.

U.S. Debt Scale and Foreign Capital Inflows

The scale of U.S. federal debt continues to expand. As of mid-2026, total debt is approaching $39-40 trillion, with publicly held debt at about $31 trillion, exceeding 100% of GDP. The Congressional Budget Office (CBO) predicts a deficit of $1.9 trillion for fiscal year 2026, and the debt-to-GDP ratio will rise further. Without substantial fiscal reform, the debt-to-GDP ratio could reach over 120% by 2036. Net interest payments have become a significant burden on the budget, expected to exceed $1 trillion in fiscal year 2026.

In this context, foreign capital inflows are crucial. From 2025 to 2026, net foreign inflows into U.S. Treasuries and other assets increased significantly. From May 2025 to April 2026, inflows approached $900 billion, including about $361 billion from February to April 2026. Private sector investors were the main driving force, with continued inflows from Europe, Japan, the Cayman Islands, and other places. This helped the U.S. roll over debt at relatively low costs while alleviating downward pressure on the dollar.

However, the sustainability of capital inflows depends on dollar confidence and the global geopolitical environment. Sanctions tools (such as asset freezes against Russia) reinforce the "privilege" of the dollar system but also stimulate diversification efforts. Central bank gold purchases remain at high levels: net purchases of 244 tonnes in the first quarter of 2026, led by Poland, China, and others. Data from the World Gold Council shows accelerated accumulation of central bank gold reserves, expected to maintain strong momentum in 2026.

Dollar Defense Mechanisms and Allegations of Market Manipulation

Dollar defense involves multi-dimensional tools: monetary policy signals, fiscal communication, geopolitical actions, and potential market intervention. Bessent emphasized "pushing back" against non-aligned entities while sharing advantages through allies. Recent suspected intervention in the oil futures market has also been included in discussions to maintain a lower inflation environment and support the dollar.

Critics point out that the correction in precious metals in early 2026 was highly synchronized with Federal Reserve personnel changes and the dollar rebound, suggesting coordinated action. Although metal prices were previously considered overbought due to geopolitical tensions and inflation expectations, the depth of the correction goes beyond what fundamental explanations alone can justify. As the largest debtor nation, the U.S. has an incentive to suppress the performance of gold as a "competitive" asset to maintain the dollar's appeal.

However, denying manipulation does not mean the market is completely free. History shows that governments tend to stabilize key asset prices under debt financing pressure. The financing needs in 2026, combined with another $11 trillion in demand in 2027, make a short-term strong dollar policy inevitable, but also exacerbate long-term unsustainable contradictions.

Logical Conflict in the Gold Revaluation Debate

Some viewpoints advocate that the U.S. alleviate debt pressure through gold revaluation, i.e., increasing the official valuation of gold reserves to improve the balance sheet. Based on estimates, fully backing U.S. debt with current official gold reserves would require a revaluation to over $150,000 per ounce ($90,000 as of 2020). However, this move faces fundamental obstacles: the gold market is global; revaluation would cause the dollar to depreciate against other currencies, triggering capital outflows and being counterproductive.

Pricing of certain U.S. Mint products or large call options in the options market have been interpreted as signals of revaluation, but these are mostly collectible demand or low-probability, high-reward speculation, not solid evidence. The proposal for a 50-year gold bond raised by figures like Judy Shelton, while theoretically attractive (could reduce long-term borrowing costs and showcase a gold anchor), directly conflicts with Bessent's goal of strengthening dollar confidence. Acknowledging gold as a long-term alternative would undermine the current dollar defense narrative.

Revaluation and manipulation narratives are inherently opposed: the former requires high gold prices, while the latter aims to suppress them. The two are difficult to reconcile. The U.S. is more likely to maintain the status quo through structural reforms and diplomatic means rather than aggressive monetary reset.

Long-Term Outlook and Portfolio Management Implications

Despite short-term dollar defense pressures, the fundamentals of gold and silver remain supportive. Unsustainable debt, inflation risks, central bank diversification needs, and geopolitical uncertainty will drive long-term price increases. Institutional forecasts show that average gold prices in 2026 may be in the $4,000-5,000 per ounce range, with long-term upside potential. Silver, with dual industrial and monetary attributes, may perform better in an economic recovery.

Portfolio construction should emphasize diversification and risk balance. It is recommended to conduct a comprehensive assessment of income, expenses, assets, and liabilities to set reasonable allocations for stocks, bonds, precious metals, and cash. A precious metals allocation of 10-20% can serve as a hedge against inflation and systemic risk, but excessive concentration should be avoided to cope with volatility. Regular rebalancing, attention to Federal Reserve meetings (such as the July meeting), and geopolitical dynamics are crucial.

Against the backdrop of ongoing dollar defense, short-term precious metal prices may face pressure, but medium-to-long-term fundamentals support recovery. Historical experience shows that holding some physical gold and silver helps preserve value in the event of policy errors or debt crises. Investors should focus on data-driven decisions rather than a single narrative, building resilient global asset allocations.

Conclusion

The current U.S. dollar defense strategy reflects the coordination of fiscal and monetary policies, aimed at addressing the challenges of massive debt financing and de-dollarization. Through capital attraction, geopolitical pressure, and market stabilization measures, the U.S. has successfully alleviated pressure on the DXY support level and boosted foreign capital inflows. However, the sustainability of this strategy depends on global confidence and domestic fiscal discipline. As alternative assets, gold and silver's short-term volatility does not alter their long-term appeal. Both policymakers and investors need to be vigilant about the inherent tensions in the debt-dollar-gold triangle, seeking balance and resilience in an uncertain environment.