By Joseph H Davis
What are we to make of gold and US stocks, especially tech-heavy indices, recently hitting record highs around the same time? Traditionally, gold surges when equities correct, but this time, both have risen together, defying conventional wisdom. Faced with what look like increasingly frothy prices, analysts and commentators are wondering which asset is more overvalued. But short-term considerations aside, the simultaneous rise in gold and AI-themed tech stocks may signal something deeper, opening a window onto our economic future and revealing something that economists, policymakers, and investors should not ignore. The prevailing outlook – steady GDP growth around 2% per year, with the inflation rate heading toward 2%, as projected by the Federal Reserve and others – does not align with a dual ascent for gold and stocks. Instead, the market is beginning to contemplate a future that is more complex. As I show in the book Coming Into View: How AI and Other Megatrends Will Shape Your Investments, the odds of non-consensus outcomes for the US economy exceed 80% over the next five years. This high probability reflects the growing tug-of-war between the transformative potential of AI and the structural drag of mounting fiscal deficits.
My research, based on 130 years of new data, points to a bifurcated economic diagnosis (one that is consistent with the rise in both gold and US stocks). Not only do two likely paths emerge, but neither is what most economists may expect. The most likely outcome is an “AI-wins” scenario, where AI-enabled technology becomes a general-purpose force akin to the personal computer or the internet, lifting real (inflation-adjusted) GDP growth past 3% by 2030, and driving corporate earnings higher. The US equity market is increasingly anticipating this future, and many investors are fearful of missing out on what could be a once-in-a-generation opportunity. Alternatively, in a more pessimistic “deficits-dominate” scenario, AI under-delivers, and the weight of fiscal imbalances – exacerbated by societal ageing and geopolitical tensions – keeps interest rates high and drags down growth. Owing to gold’s historical role as a store of value in times of monetary stress, many see it as a hedge for a future in which US economic exceptionalism wanes. If the economic outlook is as bifurcated as I suggest, how should investors position themselves for the next several years, given the push-pull between productivity-driven optimism and debt-driven caution? Would a mix of gold and US tech stocks best balance these risks over the next 3-5 years? My research says no. Instead, if we start thinking about the second half of the chess board, we find more compelling investment op portunities. If AI continues to transform the economy (as in the AI-wins scenario), investors might consider allocating more of their stock holdings outside Silicon Valley. In every technology cycle, the firms producing the new technology do initially outperform (sometimes by fantastic or even “irrational” levels), but as the technology spreads, it is non-tech companies that benefit. That is what happened with manufacturers and service companies during the age of electricity.
Similarly, in the age of AI, health care or financial companies could hold the most transformational potential, implying a rotation in stock outperformance, with the best returns shifting from technology stocks to other sectors. My research finds that much of the value premium shows up during the diffusion of general-purpose technologies. The more pessimistic scenario also has an under-appreciated dynamic: gold may not be the optimal investment that many think it is. Our work shows the Fed most likely will fight to keep inflation at bay. As in the mid-1980s, higher short-term interest rates will help to offset (at least partly) the disappointment of a tepid equity market. In this world, gold would underperform. Even if AI disappoints, the Fed’s inflation-fighting mandate is the Achilles’ heel for gold buyers, but a boon for bond investors in an otherwise challenging investing environment. Here, again, non-US stocks and non-tech stocks could soften some of the blow. In quantum mechanics, there is a concept known as superposition: a state in which an object can exist in multiple places simultaneously.
Our economic future is following a similar pattern. The co-movement of gold and equities seems to defy conventional wisdom, but that is because the economic outlook is unconventional, too. It is easy to dismiss this dual rise, given the apparent froth and momentum in the financial markets today. But it is sending a signal that economists, policymakers, and investors should heed: one way or another, structural economic change is coming.
The writer is Vanguard Global Chief Economist and Global Head of the Investment Strategy Group.
