Central bank body BIS raises concerns of gold and stocks double bubble

Gold bars are shown stacked in a vault at the United States Mint on July 22, 2014 in West Point, N.Y. (AP Photo/Mike Groll, File)

LONDON — The combination of gold and share prices soaring in unison is a phenomenon not seen in at least half a century and raises questions of a potential bubble in both, global central bank umbrella body, the Bank for International Settlements, says.

While equity markets continue to be driven by AI and tech gains, gold’s 60 per cent surge this year is set to be its biggest since 1979, fueling debate about whether its traditional role as a safe-haven asset has changed.

“Gold has behaved very differently this year compared to its usual pattern,” Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic Department at the BIS said as it released its final report of the year on Monday.

“The interesting phenomenon this time has been that gold has become much more like a speculative asset.”

Dubbed the central bank to the world’s central banks, the BIS has given regular warnings about potential stock market bubbles in recent years, but its concern around the co-movement with gold is two-fold.

Where would investors shelter if stocks and gold both crash. And what could it mean for central banks and other reserve managers given some have been heavy buyers of gold.

The BIS’ analysis concluded that this year has been the first time gold and the S&P 500 have jointly exhibited “explosive behavior” in the last 50 years.

Not only is gold up 60 per cent this year, it is up more than 150 per cent since 2022 when the post-COVID pandemic surge in inflation began to impact markets, alongside Russia’s invasion of Ukraine and subsequent Western sanctions on Moscow.

Another possible bubble warning sign is that retail investors have also been piling in.

Gold exchange-traded fund (ETF) prices have been consistently trading at a premium relative to their net asset value (NAV) this year, signaling “strong buying pressure coupled with impediments to arbitrage,” the BIS said.

Central banks’ purchases have “clearly set a very firm tone in the price of gold,” Shin added.

“Whenever you have prices actually doing quite well, you will see other investors jumping in, and certainly retail investors have also taken part (in the rally), and not just in gold.”

GROWING FRAGILITY

The BIS gave a broader warning too about the “growing fragility” of the risk-on environment amid the concerns about artificial intelligence (AI) valuations and the recent 20 per cent dives in cryptocurrencies like bitcoin.

The European Central Bank and Bank of England have both raised their own AI bubble concerns in recent weeks and the risk of an abrupt burst if investors’ rosy expectations are not met.

Shin said the profits being made by the AI firms - now spending enormous amounts on data centers - was an important difference between now and the “dotcom bubble” of the early 2000s when firms weren’t making money.

The “fundamental question,” however, is whether those expenditures will be seen as being justified in the long run, Shin said, adding that the other key determinant for markets will be how the global economy holds up next year.

“So far, activity has been surprisingly resilient,” Shin said.

The BIS is also watching where the dollar goes from here. This year it is headed for its biggest annual drop since the Lehman Brothers collapse in 2007.

“After the April episode (when U.S. President Donald Trump announced sweeping trade tariff plans), the dollar has been relatively stable,” Shin said.

“I think the hedging behavior of non-U.S. investors is going to be a very, very important input into how markets will co-move from here.”

(Reporting by Marc Jones; Editing by Susan Fenton)