Searching for meaning in the gold rally

Gold prices are behaving like we’re on the brink of a financial crisis.

The safe-haven asset hit $4,000 an ounce for the first time this past week, recording its largest rally since the late 1970s.

Investors from retail to pension funds spent $9.3 billion on exchange-traded funds linked to gold last month, according to Morningstar Direct. But the investor anxiety that often fuels a gold rush seems to be missing from the rest of the market.

Often when gold soars, stocks drop. For example, as the price of gold soared more than 600% from 1970-79, when adjusted for inflation, the S&P 500 sank 11%. A similar pattern appeared during the Great Recession, when gold rose 37% from January 2008 to December 2009 while the S&P 500 nose-dived 23%.

By contrast, as gold was taking off this past week, the S&P 500 recorded a high on Wednesday. Signs of crisis were also absent from bond markets and the U.S. dollar: Long-term U.S. bond yields have been relatively flat, and the dollar’s value has been stable the past few months after a dip following President Donald Trump’s tariffs announcement in April.

Joe Davis, the global chief economist of Vanguard, told DealBook the discrepancy between the stock market and gold is “almost unprecedented.”

So what’s going on? Davis said investors seem to be reading the economy in “dramatically different” ways.

The pessimists

For a big bet on gold to pay off, Davis said, more than one big thing would have to go very wrong: Artificial intelligence, which has fueled the stock market’s growth, would prove a dud; the equity markets wouldn’t find other growth avenues to offset that AI dip; there would be a flight from U.S. Treasury assets, creating pressure on the dollar; and the Federal Reserve would abandon its fight against inflation, perhaps because of a loss of independence.

Holding gold can be expensive, as Warren Buffett once warned, because it doesn’t produce any income. (“If you own 1 ounce of gold for an eternity, you will still own 1 ounce at its end,” is how he put it.)

Some mainstream investors are betting on the asset nonetheless. Ray Dalio, founder of Bridgewater Associates, said at a conference Tuesday that gold is safer than the U.S. dollar. He recommended that investors allocate up to 15% of their financial portfolios to gold (a significant change from the 60/40 stock and bond portfolio split traditional financial advisers provide).

Morgan Stanley recently suggested a 60/20/20 portfolio split, with bonds and gold equally weighted. “Gold is now the anti-fragile asset to own rather than Treasuries,” Mike Wilson, chief investment officer at the bank, said at the Reuters Global Markets Forum.

Ken Griffin, founder of Citadel Securities, summed up the pessimistic view at another conference Monday: He said many gold buyers think, “I now view gold as a safe harbor asset in a way that the dollar used to be viewed.”

The optimists

Another investor perspective is that, despite economic risks like the ballooning debt of the U.S. and European Union, advances in AI will keep the economy hot, offsetting any threats.

“A lot of people, including a lot of big money, are confident in that more optimistic scenario,” said Ryan Chahrour, an economics professor at Cornell University.

Also, Fear of Missing Out

“Financial markets are like fashion,” said Robin Brooks, an economist and senior fellow at the Brookings Institution. “It’s like bell-bottom jeans are back.”

Whether investors and money managers are primarily pessimistic, optimistic or just afraid of missing out, it’s hard to tell how much of the gold rally is about their sentiment at all: Central banks around the world have been stocking up on bullion for years to protect themselves against the possibility of Western sanctions and political uncertainty.

For now, economists and investors alike are in a game of wait and see. “Somebody’s going to be right eventually,” Chahrour said. “So either the financial markets are slow to adapt to the new circumstances, or the run-up in gold will be temporary.”

This article originally appeared in The New York Times.