Goldman Sachs' view captures a tense sentiment that has permeated the market this month: investors are worried that printing money will trigger inflation in the coming years, and have been selling dollars and buying gold heavily as a result.

Goldman Sachs Group issued a bold warning on Tuesday that the US dollar is in danger of losing its global reserve currency status, making market concerns about suddenly deepening US inflation the focus of the spotlight.

As the US Congress is about to launch a new round of fiscal stimulus plan to boost the economy ravaged by the COVID-19 pandemic, and the Federal Reserve has expanded its balance sheet by about $2.8 trillion this year, Goldman Sachs strategists warned that the US policy is causing "devaluation concerns", which may end the dominance of the US dollar as the leading force in the global foreign exchange market.

Although this view by Goldman Sachs is clearly still a minority in the financial industry - and Goldman Sachs analysts have not claimed that they believe it will inevitably happen - this view captures a tense sentiment that has permeated the market this month: investors are worried that printing money will trigger inflation in the coming years, and have been selling dollars and buying gold heavily as a result.

Goldman Sachs strategists, including Jeffrey Currie, wrote in a research report that "gold is the last currency, especially in the current environment where governments are holding down their fiat currencies and pushing real interest rates to historical lows." They pointed out that "what people really worry about now is the durability of the US dollar as a reserve currency.

The Goldman Sachs report clearly shows that when the COVID-19 pandemic began, Wall Street's initial reluctance to warn about inflation was fading. After the introduction of fiscal and monetary stimulus measures after the 2008 financial crisis, many analysts' predictions that prices would rise were dashed, which severely hit them. Therefore, they have been unwilling to repeat such predictions, especially in the context of a deep recession in the economy.

However, as gold prices soar to record highs, bond investors' inflation expectations are rising almost every day - although starting from very low levels. As a result, the debate about the long-term effects of stimulus measures has become increasingly loud.

The 10-year breakeven ratio (i.e. the difference between nominal and inflation linked bond yields) has risen to around 1.51%, far above the low of 0.47% in March. This further reduces the actual yield, excluding the impact of inflation, to below zero, and the actual yield of bonds with similar maturities is about -0.92%.

In addition, there are predictions that the Federal Reserve will soon link policy interest rate guidance to prices, which will at least provide some temporary space for inflation to exceed the Federal Reserve's 2% target, thereby increasing upward pressure on inflation expectations.

Analysts at Goldman Sachs wrote, "The resulting expansion of the balance sheet and the massive printing of money have stimulated concerns about depreciation." They pointed out that this creates a "greater possibility that at some point in the future, after economic activity normalizes, central banks and governments will have the power to raise inflation to higher levels to alleviate the accumulated debt burden.

The record high rise in gold prices highlights the fact that people are increasingly concerned about the prospects of the world economy. Goldman Sachs has raised its 12 month target price for gold from the previous $2000 per ounce to $2300, compared to the current gold price of around $1930. Goldman Sachs expects that US real interest rates will continue to decline, further boosting gold prices.

Meanwhile, the Bloomberg dollar spot index is about to experience its worst July performance in a decade. After the EU agreement introduced a rescue plan that could change the "rules of the game", the market once again predicted the demise of the US dollar, which stimulated the euro and would lead to joint bond issuance.

In Goldman Sachs' view, the growing debt levels in the United States and other regions (currently exceeding 80% of US GDP) increase the risk that central banks and governments may allow inflation to accelerate.

The Federal Reserve will make its latest policy decision on Wednesday, and investors are looking forward to hearing more about the bank's views on inflation.