Why gold and stocks are partying together
These booms are connected, but not in the way you may have heard
A STRANGE twist is playing out in global markets. Gold is partying like it’s 1979, and stocks are partying like it’s 1999. But those two eras could not have been more different, the first marked by rampant inflation and geopolitical turmoil, the second by the dotcom mania and relative calm.
Most analysts think gold is soaring amid a new stock boom because investors want to hedge against rising policy uncertainty, particularly in the US. This theory implies, however, that global investors have an extraordinary tolerance of cognitive dissonance in fully embracing artificial intelligence-driven optimism for US stocks and the caution associated with gold. It also just seems a bizarre choice – why hedge with gold at a time when more direct forms of protection (such as buying put options on stocks) are cheap by comparison?
I think there is another explanation for the gold-stock duet: massive liquidity. Governments and central banks rolled out trillions of dollars in stimulus during and after the pandemic. Much of that is still sloshing around the system and continues to drive the momentum trade across many assets, including stocks and gold. On the back of it, the sum Americans hold in money market mutual funds surged after the pandemic and now totals US$7.5 trillion, or more than US$1.5 trillion above the long-term trend.
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