AI technology "bubble" warning sounded! Gold broke through 2500 to hit a record high. Bitcoin "decoupled" and no longer a safe haven

FX168 Financial News Agency (Asia Pacific) Gold has successfully reached a record high of $2,500. In terms of inflation-adjusted prices, gold prices are not close to the price at which gold was traded in January 1980, but are challenging this level. With strong pricing for the Fed's "dovish" rate cuts and warnings of a tech stock crash, market analysts believe that once the bubble bursts, gold will stick to buying, but Bitcoin will fall because it is no longer considered a safe-haven asset.

According to Wolfgang Münchau, a DLNews columnist, co-founder and director of Eurointelligence, the price of Bitcoin is already much higher than at the end of 2022, but there is a difference between the steady rise in gold prices since 2000 and the sudden surge in Bitcoin prices.

Source: DLNews

"The difference is that if investors are worried about financial instability, they will turn to gold. Bitcoin is the ultimate risk-on investment with the characteristics of a technology asset," he explained.

Read more: Prepare for a weaker dollar as China continues to secretly build up its gold reserves

Going deeper, Wolfgang said that Bitcoin is not a depreciation hedge or a hedge against the tech bubble. Several top investors, such as Warren Buffett and George Soros, have recently announced that they have withdrawn from certain areas of the high-tech industry.

Hedge fund Elliott has warned that the artificial intelligence (AI) boom is a hype, especially NVIDIA's stock price. Wolfgang generally agrees with the judgment that "AI has entered a bubble zone."

The reason for this is that Wolfgang believes that this revolution will not prevent the long-term decline in productivity growth throughout the West. The United States has successfully reversed the trend of slowing productivity growth, but if the technology industry is excluded, the United States is not much different from Canada or Europe.

The productivity miracle of the technology industry is related to the stock market that provides cheap capital to the industry. When this capital flow ends, the productivity gap between the United States and Europe is expected to narrow. If productivity growth slows down, why can corporate profit growth remain high? Judging from the current valuation, they think so. Over the long term, you would expect the two to be the same.

There are a number of ways to look at gross domestic product (GDP), one way is to think of it as the sum of all profits and all wages. For most of this century, profit growth outpaced GDP growth, and therefore wage growth, because politics and demographics favored corporate profits.

That is now changing. Until the last century, the S&P 500's P/E ratio fluctuated between just under 10 and 20. That was a period of relatively high productivity. The current P/E ratio is 26, and the Nasdaq is 40. It's hard to see how these valuations can be sustained if long-term productivity growth is declining.

The extremely high valuations of tech stocks and crypto assets are based on extremely optimistic assumptions about future earnings growth. Crypto technology brings the promise of financial innovation, but it may take another 10 or 20 years before it is relevant to the macroeconomy. AI will undoubtedly affect people's lives. But both the beautiful imaginations about AI and the panic stories are exaggerated.

The AI ​​chatbot ChatGPT is useful for technical tasks, especially programming, but it seems to be of no help for journalism. Wolfgang recalled the past. Does he remember that in 2017, everyone predicted that we would have self-driving cars by now? We are still many years away from that utopia. If we are lucky, we can have cars driving autonomously on the highway in 10 years.

So what will happen to Bitcoin if the market crashes?

He responded in the article: "Of course, Bitcoin is as inflation-resistant as gold, or even stronger than gold. Gold has supply risks. Central banks may release large amounts of gold reserves into the market. Or new gold may be discovered. But no new Bitcoin will be found, and there can be no supply shock."

"Unfortunately, this does not solve the problem. At present, the fate of Bitcoin is intertwined with the fate of the technology industry. Many investors regard cryptocurrencies as part of their technology portfolios. Crypto assets, especially Bitcoin, have acquired the attributes of traditional investments through exchanges, stablecoins and spot ETFs over the years."

Looking at the precious metals market, gold is at the other end of the portfolio, a safe-haven, boring part. Wolfgang emphasized: "People generally don't invest in gold to make a lot of money. Gold investors behave more like a 'cult'. I have been wondering why so many older male gold lovers wear bow ties. This is a group of strange people."

The article states that there are also many weirdos in the cryptocurrency world, but it is very different from gold. This also applies to the way both respond to bubble bursts. In this case, liquidity will be lost from the system. Traders will rush to meet margin calls.

Wolfgang further noted: "The financial world is not as fragile as it was in 2008, but I think a tech crash of the magnitude that is expected would be a source of financial instability. Therefore, when the market crashes, Bitcoin is expected to crash with it. But Bitcoin and other crypto assets will eventually recover, as will some (but not all) of the currently soaring tech stocks."

Read more: Seize the Opportunity: Why You Should Buy Gold After the Market Crash

The reason for his long-term optimism is that crypto assets have an important thing in common with gold: scarcity makes them a safe long-term investment.

This is true even if most investors don't view Bitcoin that way now.

A few years ago, the author did not accept the idea that scarcity has intrinsic value, feeling that it needs to be linked to something else, such as industrial use, aesthetic value, or in the case of gold, a time-tested consensus that it has value in itself.

Today, Wolfgang has changed his mind on this point. In a world where central banks are recklessly expanding their balance sheets and governments are turning their currencies into geopolitical weapons, ensuring scarcity has value in itself.

He concluded: “But this is long-term. If the bubble bursts in the next one or two years, I believe Bitcoin will fall with it, but gold will not.”