News & Insights
Silver and gold, silver and gold, sang Burl Ives as the Claymation snowman Sam in Rudolph the Red-Nosed Reindeer (apologies, sort of, for the earworm). Anyone who bought silver and/or gold a couple weeks ago is probably not singing a merry tune this week, as the price of these precious metals commenced a precipitous plummet last Friday that has continued into this week. The gold bugs can at least take comfort in the fact that they’re not alone. A wide swath of folks from crypto enthusiasts to lovers of software-as-a-service companies and hyperscale AI titans are feeling an unusual amount of pain as financial markets have shifted into an abrupt reverse. Yes, the S&P 500 is up in early morning trading today (heaven only knows where it will be by the time you are reading this). But the sentiment is edgy, to say the least. The CBOE VIX index, popularly known as Wall Street’s fear gauge, is back above 20, signaling a high degree of skittishness among market participants.
Several Walls of Worry
There may not be much commonality between the nosedive in the price of silver, say, and the problems facing tech stocks. Or is there? We’ll come back to that in a bit, but let’s talk here about the week in tech, because it has been unusual. Two prominent Magnificent Seven companies, Alphabet (parent company of Google) and Amazon, released earnings reports that could only be called blockbuster – not only beating analysts’ estimates for sales and earnings but raising forward guidance and demonstrating strength in their core strategic franchises. Both stocks are down, though, with Amazon off nearly ten percent in trading after the release of its report earlier this morning. The culprit? Among the blowout numbers reported are big, big increases in planned capital expenditures, mostly to continue funding AI infrastructure buildout and well in excess of what Street analysts had been expecting. The huge costs associated with chasing AI supremacy seem to be, finally, weighing on investor sentiment.
Why now, though, since stratospheric capex has been a central theme in the AI story for many quarters to date? It might have something to do with another wall of worry in evidence this week, in the form of a chap named Claude. Well, an AI model named Claude, which is an offering by Anthropic aimed at revolutionizing business and knowledge processes for enterprises, notably those in publishing and legal services. The problem, or at least the catalyst behind a lot of selling in the software space this week, is that Claude’s demonstrated capabilities in AI agentics could kneecap the companies that provide software as a service to these very same legal services and publishing companies, and presumably enterprises in many other industry spaces as well.
Now, to bring these two walls of worry together, the software-as-a-service companies caught in the wake of the Claude splash are also big clients of the data centers served by the AI hyperscalers like Amazon and Alphabet. All of this seems to have investors wondering who is going to benefit, ultimately, from all the capex spend and who is going to end up with a big fat negative return on investment. The AI story got a lot more complicated this week, and it is showing up in lots of different places.
Everything Is a Prediction Market
Returning to the broad-based carnage across many asset classes this week, is there anything that might serve as a thread running through them all? In traditional times, gold was regarded as a hedge asset. If you didn’t like the way things looked in the world, if the stock market seemed overpriced or the US dollar looked weak, or wars looked like they might break out, gold was where you might seek some refuge from the perceived coming storm. Indeed, for much of the past twelve months we have been hearing a great deal about gold as a hedge from financial media types.
But were people really buying gold as a hedge, or were they buying gold because everyone else was buying gold? Same for silver, same for bitcoin and other cryptocurrencies. Probably a bit of both, but we shouldn’t ignore the speculative impulse behind much of what drove prices higher, particularly this year. At its peak on January 26, silver was up 63 percent for the year to date. In other words, 63 percent over the course of 26 days. As of this morning it’s up just eight percent. Gold, in a somewhat less dramatic fashion, peaked at a gain of 23 percent before shedding 15 percent in a matter of days.
All at the same time that risk assets like stocks were falling. Not much of a hedge there, huh? It’s easy to speculate, though, when taking a position in gold (or silver, or bitcoin) is as effortless as, say, taking a position on the outcome of the forthcoming Seahawks – Patriots showdown, or how many field goals will happen in the third quarter of the game, or how many minutes into the game the first Bud Light commercial will air. Everything is a prediction market now. Including mainstream finance. That, quite possibly, is the thread running through assets of many different flavors.