Among this year’s less dreadful weirdness, gold bullion and US tech stocks have both surged together to fresh all-time highs. A visitor from 2010 would be amazed, never mind a time-traveller from the year 2000.
The Nasdaq index stands for ingenuity and progress, led by pioneer CEOs like Elon Musk of Telsa (Nasdaq: TSLA). Gold is more commonly seen as a “barbarous relic”, a throw back to the Dark Ages whose role as money appeals to doomsday preppers and murderous cult ISIS.
How can the Nasdaq ride a bull-market in tandem with the deathless metal? This marks a dramatic switch from gold and tech’s previous see-saw. It also points to how deeply damaged the wider economy may prove after lockdown finally lifts.
From hated to must-have
Twenty years ago gold was deader than punk, unloved even by the Chancellor Gordon Brown, who dumped half the UK’s official reserves onto a market already glutted by central-bank sales and speculative short selling by gold-mining bosses.
“Who needs gold when we have Alan Greenspan?” asked the New York Times, pointing to the US Federal Reserve’s then genius-in-chief. The metal finally found a floor at $250 per ounce, down almost 70% from its 1980 peak. The Nasdaq 100 in contrast welcomed the new millennium with a 20-fold increase from 10 years earlier.
The DotCom Crash ending in 2003 deflated that bubble by 80%, and the global financial crisis starting in 2007 than erased almost all of the Nasdaq’s ensuing rally. Gold meanwhile rode the see-saw higher, enjoying its first decade-long gains since the 1970s and topping at $1900 in summer 2011 – matching its 1980 high in real inflation-adjusted terms – as ratings agency S&P downgraded US Treasury debt from triple-A, the Greek debt crisis threatened the end of the Euro currency, and England suffered its worst rioting in more than two centuries.
Then the pendulum swung back, US equities began their longest bull run in history, and gold sank 45% by the end of 2015. “Let’s be honest, it’s a pet rock,” said the Wall Street Journal. For tech stocks in contrast, the hashtag “stonks” appeared for the first time on Instagram (now part of Facebook (Nasdaq: FB)) to describe just how fast and relentlessly they rose.
2020: Barbaric yet high-tech
What changed to unite these investment opposites? Certainly not gold. It remains incorruptible, unyielding and almost useless to industry (less than 10% of annual demand comes from electronics, medicine and dentistry combined). Gold does so little in fact, it cannot even corrode.
So even as the lockdowns imposed to fight the virus (a truly barbaric measure for some) handed a near-monopoly of retail, entertainment and business networks to the world’s tech giants, gold’s permanence has gained strong appeal amid the uncertainty and anxiety caused by Covid-19. Shares in teleconferencing app Zoom (Nasdaq: ZM) have risen 7-fold since New Year. Gold-backed ETFs have meantime enjoyed record inflows, swelling their shares in issue by 32%, while demand for securely stored gold – available all through the pandemic while traditional coin shops were forced to shut – has jumped 45% on BullionVault to total £2.1bn today.
Aside from these social and emotional responses, three deep financial trends have also made allies of tech and gold during the pandemic so far.
1. Zero and negative rates
Spring 2020’s crash in both financial markets and economic forecasts drove a fresh collapse in interest rates. That cut the opportunity cost of owning bullion to new all-time lows versus cash and bonds. It also favours low- and no-income shares over boring old banks and utilities. Because who needs a dividend when fixed-income pays nothing? This extends a decade-long trend, with growth stocks worldwide now outperforming value stocks 2-to-1 since the global financial crisis, according to analysts at Goldman Sachs.
Yes, covid lockdowns drove consumers to rely on the FANGs (Facebook, Amazon, Netflix and Google) for contact with the world outside their door. But the zero-and-negative rates which those lockdowns created also helped make Apple the world’s first-ever $2 trn stock despite offering a dividend yield of just 0.7% per year. Amazon continues to pay its shareholders nothing but trades at 120 times earnings. Storing and insuring physical gold bullion meantime costs less at 0.12% per year than owning 30-year German Bunds, 10-year French OATS, or even – very briefly in August and September – 5-year UK Gilts. And unlike government debt, gold cannot be created at will.
2. Lockdown liquidity
Although the Covid Crisis has badly hurt lower-income families, Western households as a group have paid down debt and built savings at a record pace since March. Subsidised by record peacetime deficit spending from governments desperate to avoid Much of this spare cash has found its way into equities and other assets as people stuck online at home have sent retail-investor trading volumes to new all-time records.
This boom has been aided by innovations such as free, fractional and virtual share-dealing via apps like Robinhood, plus the very DotCom Bubble return of celebrity ‘day traders’ led by former sports gambler Dave Portnoy. It has also coincided with more cautious savers wanting to spread their risk and choosing gold as a form of portfolio insurance. So too have a growing number of private banks, money managers and even pension-fund mandates.
Judged against the former see-saw between tech stocks and gold, 2020 is seeing more even betting, with investors as a group insuring the surge in their equity holdings by buying bullion. More urgently, and despite the deeply deflationary macro outlook – now showing up as falling consumer prices across the Eurozone – both tech and gold have been driven higher by low and negative real returns to cash and bonds.
3. Historic deficit & monetary stimulus
By any measure, the Covid pandemic and lockdowns have given the global economy its deepest deflationary shock of modern times, if not ever. To try offsetting it, central banks and governments are throwing unprecedented volumes of cash at supporting incomes and business, with big stimulus spending set to follow (and already started in China, source of the virus and first to tame it).
Don’t underestimate the challenge; major sectors have suffered permanent damage, the Eurozone has joined Japan in deflation, and furlough cannot run forever, not unless governments and central banks actively adopt Modern Monetary Theory and Universal Basic Income to replace inflation-targeting and budgetary management. Highly radical and contentious, both ideas are however fast-gaining fans outside academia, not least because the policy response to Covid-19 is effectively a trial run for unlimited deficits and monetization.
Some gold bugs lambast central bankers for too-easy money, saying that it is driving only a surge in the stock market, rather than any economic recovery. But they should also thank policy-makers for gold’s record highs too. Whatever the outlook for tech-stock earnings and growth, and whatever the future for MMT and UBI, the value of money itself will remain under sustained attack from governments and central banks desperate to avoid deflation. Gold prices are likely to continue benefiting if they succeed.
Further reading: Gold performance to continue as covid 19 impacts into the future