Discover the Hidden Gold: Insights on Economic Resilience and Opportunities Amid Global Change – Asia Times

In the last couple of years, investors have shown a strong interest in AI technologies. This surge has helped tech stocks drive the S&P 500 to impressive gains of around 60%. Alongside this, many have turned to a traditional asset: gold. This precious metal has risen nearly as much as tech stocks, performing better than other options meant to protect against dollar fluctuations.

But why do investors hedge against potential turmoil during a seemingly prosperous tech age? The answer lies in uncertainty. The tech industry has become a vital part of the dollar-driven global financial system. The U.S. has accumulated a staggering $24 trillion deficit in its international investments, meaning it has sold more assets to foreigners than it’s bought back over the years.

Foreign buyers are shifting their focus. Unlike in the past, they are now purchasing more stocks than U.S. Treasury bonds. Recently, foreign central banks hold less American government debt than they did five years ago. If the tech boom is merely a bubble, the U.S. dollar might face severe consequences.

The competition for AI advancements could impact the dollar’s stability. If a country like China develops a leading AI model that surpasses the likes of ChatGPT, it could negatively affect U.S. tech stocks and the dollar’s value.

Hedging against the dollar is crucial, but many options aren’t appealing. The American budget deficit is unprecedented, running between 6% and 7% without the backdrop of a recession or war. Still, the dollar remains the world’s reserve currency, granting the U.S. privileged access to global capital.

Interestingly, despite inflation affecting many currencies, gold has defied the odds and appreciated in value. Historically, gold’s price rises when U.S. Treasury yields increase, but from 2007 to 2022, that trend shifted. Following geopolitical tensions, particularly the freezing of Russian assets in March 2022, many central banks began favoring gold over U.S. Treasuries.

Both gold and Treasury Inflation-Protected Securities (TIPS) are seen as ways to secure value against a falling dollar. However, gold holds a distinct advantage; it cannot be seized like Treasury securities. In recent months, a considerable rise in TIPS yields can be linked to foreign central banks selling these U.S. securities.

Hedge funds are now more interested in gold as well. Typically, as gold prices rise, the costs for gold options decrease. But in 2024, something different occurred: the implied volatility of gold options, a measure of risk, increased even as gold prices went up.

This unusual pattern indicates hedges against macroeconomic risks, with gold standing out among various investment options. While other markets show a low cost of risk, gold options are trading at a two-year high.

Ultimately, gold holds its value independent of government authority. It acts as a reliable asset when other forms of currency or investment fail. In recent years, many global economies have seen alarming increases in their debt compared to economic output.

As the U.S. government struggles with a massive budget deficit while attempting to stimulate growth, gold’s performance serves as a warning sign about the risks involved.

Follow David P Goldman on X at @davidpgoldman