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Could AI crash the price of gold?

Could AI crash the price of gold?

It would be fair to say that commodities have been causing a stir throughout the first half of 2024, with coffee, cocoa, and even orange juice seeing their prices reach unprecedented highs at different points.

Gold, the world’s biggest and possibly most recognizable commodity, has not evaded such price action but has, in stark contrast to many others, not only achieved record prices but also managed to hold them.

While the precious metal has been trading relatively sideways in recent months, it is worth pointing out that the relative stagnation came after substantial 19.45% 1-year and 12.93% year-to-date (YTD) surges. The overall movement across the months led gold price today to $2329.5.

Gold YTD price chart. Source: TradingView

So far, the precious metal’s stellar performance has been linked to a string of factors, mostly focused on general economic uncertainty stemming from uncomfortably elevated inflation and persistently high interest rates, a global central bank buying spree, and geopolitical instability.

Still, there may be another explanation – or, at least, a contributing factor – for gold’s rise to new all-time highs (ATH): the ongoing artificial intelligence (AI) boom.

How AI may have helped gold surge

For the longest time, gold has been a generally useless metal, with its value almost entirely linked to its cultural significance. Even before the Bretton Woods agreement was suspended and then abandoned, gold presented a relatively circular argument – it was valuable primarily because it is gold.

More recent decades and the emergence of a world permeated by electronics have changed the situation drastically. 

Thanks to its resistance to corrosion, excellent conductivity, and malleability, gold found its industrial footing with applications in connector pins, circuit boards, medical devices, and, indeed, the increasingly important semiconductors.

Indeed, in late October 2023, Metals Focus, a consultancy focused on precious metals, notified investors that AI technology’s growing popularity and proliferation will likely lead to a substantial increase in the price of the world’s foremost commodity.

The prediction has, apparently, come true, given that gold was priced at about $1,800 per ounce late last year and rose above $2,300 just months later.

Is the AI boom the leading factor enabling gold’s ATH

Though it would be difficult to quantify just how big a part the surge in demand for AI-powering semiconductors played in the gold rally, recent earnings reports and stock market performance of companies like Nvidia (NASDAQ: NVDA) offer some hints.

NVDA stock 1-year price chart. Source: Finbold

Indeed, industrial demand may have played a substantial role given that certain reasons identified as driving up the price of the precious metal – such as fears arising from the strengthening alliance of Russia and China – ring somewhat hollow for many living south of Gibraltar and east of Dnepr and the Bosphorus.

The likely links between AI and gold also create a systemic risk for commodity investors. Recent months have brought forth numerous warnings that the artificial intelligence sector is rapidly becoming one of the biggest bubbles in history.

Société Générale’s (EPA: GLE) Albert Edwards – notable for foreseeing the Dot-com bubbleopined in April that the technology indeed led to the creation of a major stock market bubble, while another leading U.S. economist predicted in June that Nvidia itself is set for a 98% crash for similar reasons.

There have been many examples throughout history of investor ecstasy leading to the creation of highly dangerous bubbles, even when focused on genuinely impactful sectors. 

The prime example came at the turn of the 21st century when the frenzy surrounding internet-focused companies caused a crisis despite the internet’s importance, by 2024, being beyond any doubt.

The AI boom creates a particularly dangerous situation given that it has led to massive inflows into the technology sector despite the technology arguably still being little more than promising. 

Is AI really a bubble?

Indeed, the current generation of artificial intelligence may lead to the crown jewel – artificial general intelligence (AGI) – but there are no guarantees this will happen.

Additionally, concerns surrounding the technology remain both numerous and persistent. 

On the one hand, there is significant pressure over the copyright and intellectual property (IP) infringement AI companies are likely to have committed while training their models.

On the other hand, artificial intelligence remains highly prone to error, with certain versions of many models struggling not only with providing accurate information on more complex topics but also with matters computers have traditionally been very good at – relatively simple math.

Furthermore, as evidenced by Google’s (NASDAQ: GOOGL) much-ridiculed glue-in-pizza debacle, training more advanced models may prove challenging. 

This is further reinforced by AI being subject to a common software principle of ‘garbage in, garbage out,’ and for all its merits, the World Wide Web is filled with all kinds of nonsense.

Grifters of all stripes have also compounded the problems by ensuring that potential training data is filled with AI-generated rubbish.

The final indication that AI is indeed a bubble may come from the staggering success of Nvidia – which is now the world’s largest company by market cap with a valuation exceeding $3.3 trillion at the time of publication – despite arguably being a one-trick pony. The fact that it indeed is an amazing pony does little to change the argument.

Top 10 companies by market cap as of June 19, 2024. Source: CompaniesMarketCap

Will the AI bubble crash the price of gold?

Given the AI boom’s likely impact on the price of gold and the sector’s likely status as a bubble, there is a strong possibility that once it bursts, the precious metal will no longer have a leg to stand on – at least not at its press time prices.

On the other hand, it remains possible that artificial intelligence companies will achieve a breakthrough great enough to justify the immense capital inflows and solidify the technology’s importance, rendering the bubble far more stable.

Furthermore, given gold’s role as a safe haven for wealth during crises, there is a strong possibility that even should a collapse occur, capital flight to the relative safety of the precious metal will be enough to preserve the commodity’s record-high valuations.

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