Recent market trends show both gold and U.S. equities, particularly technology-heavy indices, reaching record highs simultaneously—an unusual phenomenon that contradicts traditional investment logic. Typically, gold gains value when stock markets decline, serving as a safe haven. This time, however, both asset classes are climbing in tandem, suggesting investors are pricing in a more complex economic outlook than the conventional forecast of steady 2% GDP growth and stable inflation. n nAccording to Joseph H. Davis, Vanguard’s Global Chief Economist, this dual ascent reflects growing market anticipation of two divergent economic paths over the next five years, with over 80% probability that outcomes will deviate from consensus expectations. One scenario, labeled “AI-wins,” envisions artificial intelligence becoming a transformative general-purpose technology—similar to the internet or personal computers—driving real GDP growth beyond 3% by 2030 and boosting corporate profits. In this case, equity markets, especially those exposed to innovation, would continue to thrive. n nThe alternative, more pessimistic path—“deficits-dominate”—assumes AI fails to deliver widespread productivity gains while mounting fiscal imbalances, demographic aging, and geopolitical strain keep interest rates elevated and economic expansion sluggish. In such an environment, gold’s historical role as a hedge against monetary instability makes it attractive to investors wary of declining U.S. economic dominance. n nDespite the apparent synergy between gold and tech stocks, Davis argues that a simple portfolio split between the two may not be optimal. Instead, investors should look beyond Silicon Valley. History shows that while tech firms lead early in technological cycles, the greatest long-term value often emerges in non-tech sectors that adopt and apply innovations. During the electrification era, for example, manufacturers and service providers reaped outsized benefits. Similarly, in the AI era, industries like healthcare and financial services may experience the most profound transformation, potentially shifting equity outperformance away from pure-play tech companies. n nMoreover, in the pessimistic scenario, gold may not perform as expected. If the Federal Reserve maintains its commitment to controlling inflation—raising short-term rates as needed—real returns on bonds could improve, diminishing gold’s appeal. In such conditions, fixed-income assets and non-U.S. equities might offer better risk-adjusted returns than precious metals. n nThe current market behavior echoes the quantum concept of superposition—existing in multiple states at once. The simultaneous rise of gold and stocks is not irrational but rather a signal that structural economic shifts are underway. Whether driven by breakthrough innovation or fiscal strain, change is on the horizon. Economists, policymakers, and investors alike should pay attention. n— news from Arab News
— News Original —nWhat the conventional economic wisdom is missingnWhat 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. n nBut short-term considerations aside, the simultaneous rise in gold and artificial intelligence-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 in the US — steady gross domestic product growth around 2 percent per year, with the inflation rate heading toward 2 percent, 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. n nAs 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 percent 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. n nThe 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 percent 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. n nAlternatively, in a more pessimistic “deficits-dominate” scenario, AI underdelivers and the weight of fiscal imbalances — exacerbated by societal aging 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. n nIf 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 three to five years? My research says no. Instead, if we start thinking about the second half of the chessboard, we find more compelling investment opportunities. n nIn the age of AI, healthcare or financial companies could hold the most transformational potential. n nJoseph H. Davis n nIf 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. n nThat is what happened with manufacturers and service companies during the age of electricity. Similarly, in the age of AI, healthcare 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. n nMy research finds that much of the value premium shows up during the diffusion of general-purpose technologies. n nThe more pessimistic scenario also has an underappreciated 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. n nEven 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. n nIn 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 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. n nJoseph H. Davis is Vanguard Global Chief Economist and Global Head of the Investment Strategy Group. ©Project Syndicate n nDisclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News’ point of view