A century of gold history meets the future of AI. Which shine lasts longer?
KEY TAKEAWAYS
Gold’s rally is driven by fear, not fundamentals
AI’s rally is driven by belief in future productivity
Central bank gold buying reflects geopolitical mistrust
GLD ETF financialized gold, fueling speculative demand
Gold reflects fear; AI reflects faith
MY HOT TAKES
Gold is a religion, not an asset class
GLD turned gold into a speculative trading instrument
Central banks buy gold to signal credibility, not to earn returns
AI’s rally, while bubbly, is grounded in productive potential
Gold and AI represent opposite ends of investor psychology: fear vs. faith
You can quote me: “Gold isn’t an investment–it’s a belief system with a ticker symbol.”
Blinded by the glitz. Who doesn’t like shiny things? Gold is shiny–in fact shinier than ever having closed at all-time highs yesterday. That probably doesn’t surprise you if you have been following the narrative, which is largely “gold as a safehaven” in a stormy world. The world may be stormy, but that has not been reflected in the US equity markets. You see, the S&P 500 is also at all-time highs. Is one wrong and the other right? Let’s start the day with a chart, so you can get the sheer magnitude of gold’s recent surge. Check it out and keep reading.
This is a chart of gold (white line) going back over a century. You will notice that there was nothing going on until 1971. In 1971 US President Richard Nixon abandoned the Bretton Woods system, ending the gold standard. That standard, prior to August 1971 allowed dollars to be converted into gold. Gold, after World War II was fixed at $35 an ounce, but once the gold standard was abandoned, it became a free trading commodity. Independence! Its value became the responsibility of the free market–moving up and down based on supply and demand.
We all know that gold is limited in supply. Though many have tried, no one has figured out how to make it in the lab. Its rarity played a big role in its luster dating back to ancient times. There is a reason that King Tut was buried with so much of it–it was hard to find, and he was important enough to get a good amount of what was found. Oh, and it’s nice to look at. Oh, and it’s also soft and easy to convert into trinkets. That pretty much carried the metal through the mid-19th century when it was discovered to have good conductive properties relative to other metals. That’s right, in the Victorian era, engineers already knew that gold had some interesting industrial applications, though it was too expensive for most applications, and besides copper is still a better conductor.
Now that we are talking about industrial applications, it wasn't until the 20th century that engineers began to seek gold as a conductor despite its priciness compared to copper. You see, gold doesn’t oxidize, corrode, or tarnish. Copper is great, but have you seen the Statue of Liberty (I am blessed to have a view of her from my downtown office)? She didn’t start out green. Comparatively, I am sure you have seen those pictures of King Tutankhamun’s death mask. That dates back to around 1300 BCE, and it looks as shiny as the day it was placed on Tut’s mummified head. The ancient Egyptians probably didn’t know of its conductive capabilities, but they believed that the metal was… well, immortal.
It may be immortal, but really what is it good for other than for use in semiconductors, medical equipment, and spacecrafts? All of those are important, but beyond those quantifiable demand profiles, what else is there? Well, there is jewelry, whose demand can also be quantified. That brings me to a very important point: price discovery. Gold’s value, because it is a tradable commodity, is worth exactly what the market thinks it’s worth. So, what happened in the mid- to late- 2000s that caused it to leap above $500 and begin the rocket-ride journey that brings us to today’s $4000+ level?
I am sure that one of your first thoughts is that there is a heck of a lot more semiconductors out there these days. And while we are on it, there has been a surge in aerospace. Think of all the smartphones out there–that must have had some impact on demand for gold. It did, but it barely moved the needle. You see, industrial use for gold only represents 8% - 10% of global demand. That can’t explain how gold went from $400 in the early 2000s to over $1000 by 2009. So what was it?
I am sure that you have already figured that out. It was the Global Financial Crisis! But wait, there is something else. Just before the GFC there was a surge in inflation. Fun fact: just as 💩 was hitting the fan in 2008, CPI surged from 2% to 5.6%! Crude oil went from $60 a barrel to around $140 by mid-2008. Gold’s popularity as a hedge against inflation entered the broader investment zeitgeist, and it never left.
Let’s be clear: gold didn’t rise because of any intrinsic improvement in its usefulness or productivity. It went up because people believed it should go up. Investors bought it as a hedge against inflation and financial chaos, and that buying pressure alone pushed prices higher. If you happened to own gold, you looked like a genius. While a dollar bought you about 4% less stuff between 2007 and 2008, gold appreciated by over 40%. In other words, gold bought you 40% more. That was the moment when gold officially became less of a commodity and more of a religion.
Then came the Lehman Brother’s collapse and the brunt of the Great Recession and Global Financial crisis which only solidified gold’s place not only as an inflation hedge, but a doomsday commodity. I often joke that if the global financial system completely collapsed, it is reasonable that we would all return to using gold to transact. I emphasize the word completely.
There was another major milestone I haven’t mentioned yet. In 2004, SPDR launched its Gold Shares ETF, which suddenly made it easy for institutions and retail investors to own gold electronically. Imagine—you didn’t have to go out, find a seller, buy it, haul it, and bury it somewhere for safekeeping. No, you just bought the ETF, and the trust worried about all that stuff for you. That simplicity of ownership amplified gold’s appeal as a hedging mechanism.
But here’s the kicker: GLD didn’t make people own more gold–it made them trade more gold. It democratized speculation, not storage. Before GLD, gold’s price was discovered in vaults and futures pits. After GLD, it was discovered on trading screens. And that changed everything. Gold became financialized.
Ok, back to the chart of gold above. ☝️ Now you know why gold surged again in 2020. That was COVID. In 2020, gold surged by some 37% as a safe haven hedge. Remember the original use of gold as a hedge against inflation? Well, you might have expected that, as inflation picked up in 2021 and 2022, gold would have surged with real yields collapsing, but you would have been wrong. Gold declined during that period! It wasn’t until 2023 that it began its epic journey from around $2000 to its current level just over $4000. Inflation, though still present, is down since 2023–real yields are positive–and yet gold has doubled in price! Why?
Well, many argue that it is due to investor mistrust of the fiat system. That goes back to my joke about using physical gold as currency. The US Dollar is the world’s premier currency, and it is backed only by the perceived strength of the US Government. If global faith in the US wanes, so does the dollar. With no better alternatives, people have turned back to gold. Side note on this. The world’s first global currency wasn’t gold at all–it was silver. Gold has always been the currency of fear and prestige. Silver was the currency of trade. Did you know that in the 1400s and 1500s, if you wanted to buy silk in China, sugar in the Caribbean, or spices in India, you would pay in Spanish silver–Pieces of Eight! Not gold! Gold was for kings, while silver was for merchants. So what gives!
There is something else. Check out this chart and follow me to the finish.
Here’s a neat chart, courtesy of my friends at Bloomberg. You can see how Russia, China, India, and Turkey have all ramped up their gold purchases in recent years. Why? Because they’re trying to carve out a little independence from the U.S. as the global financial center. And they believe that owning gold—a limited-supply, highly conductive, non-corroding, shiny metal—is the way to do it.
When you can’t print credibility, you try to buy it–in gold.
Central bank buying is a big part of what has brought gold to these lofty heights. Financialization, belief system, fear, speculation, and geopolitics. So here we are–gold and the S&P both sitting at record highs, glittering for very different reasons. Gold’s rally is about fear; AI’s rally is about faith.
Gold is speculation in its purest form–a short-term belief system driven by mistrust, liquidity, and momentum. It doesn’t compound, it doesn’t innovate, and it doesn’t pay you anything while you wait. It only rises when confidence falls.
AI, on the other hand, is speculation with a purpose. Investors aren’t buying silicon chips or servers for their shine or for global power. No. They are buying the cash flows of tomorrow, the productivity gains, the margin expansion, the next wave of economic value creation! It still has risk, but at least it is productive risk.
Gold only tells you what investors fear today. AI tells you what they believe about tomorrow. One is a hedge against collapse; the other is a bet on economic progress. Both are expensive right now, sure, but only one can build something that justifies its price tag. So, when you see gold and AI both making new highs like yesterday, remember this: one shines because it reflects light, while the other shines because it creates it. 😉
YESTERDAY’S MARKETS
Stocks rallied yesterday as investors continued to shrug off shutdown risks. FOMC minutes show a narrowly divided Fed between the magnitude of future cuts, which is really nothing new, in other words: it could have been worse–stocks embraced this. Gold hit new highs on anxiety, and cryptos, including Bitcoin climbed as well.
NEXT UP
We should get weekly employment numbers and Wholesale Trade, but those are delayed because of the Government shutdown. 🫨
Central bankers will be out in force with, no doubt, much to say. Look for comments by Powell himself, Bowman, Goolsbee, Barr, Kashkari, and Daly.