What gold, bonds and tech stocks have in common
"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy common sense. John Stepek explains what's going on.
Gold has been doing well this week, poking its head above the $1,800 an ounce mark for the first time in 11 years. Meanwhile, yields on government bonds remain solidly low or even negative.
Both of those things point to “risk-off” sentiment. In other words, investors running for what they perceive to be “safe” havens. Yet, while most stocks have had a mediocre week, tech stocks continue to soar to bubbly-looking levels. That’s more of a “risk-on” trade.
What’s going on? Believe it or not, there’s a rational explanation for all this.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Why are gold, bonds and tech stocks all rising?
Tech stocks, gold, government bonds – one thing that all of these assets have in common is that they’re all beneficiaries of a world in which interest rates are lower for longer.
Gold does well out of low interest rates, assuming that rates fall faster than inflation does (in other words, as long as “real” interest rates are falling). This is why it’s not entirely accurate to say that gold benefits from inflation. Prices can be falling (we can be in deflation), but as long as interest rates are falling faster, gold can still do fine.
Government bonds (and high-grade corporate bonds) will do well out of low interest rates because they’re seen as being safe and if – as an investor – you can’t get a better rate elsewhere without taking lots more risk, then you’ll just put up with it.
As for tech stocks – what they have in common with gold and government bonds is that they are also “long duration” assets (a “long duration” asset is one that takes a long time to pay you back, whereas a “short duration” asset pays you back within a short period of time).
In “normal” times (I put normal in inverted commas because increasingly it refers to a time period which is now more than a decade in the past), money today is considered significantly more than money a year from now.
So if you’re looking at an asset which will pay you a year from now, you need to apply a discount rate to that future money. A high discount rate means that the future money is worth a lot less than money today. A low discount rate means there’s less of a difference between the two (and a negative discount rate would mean that money in the future is in fact more valuable than money today).
Putting it even more simply, we have a default mental framework of the world in which a bird in the hand is worth two in the bush. But right now, that’s not the case.
When interest rates and inflation are low, then it means that you aren’t so worried about waiting for your money. The bird in the hand really isn’t worth much more than the two in the bush. In fact, you’d rather wait for the two in the bush.
What could change this?
That broadly describes tech stocks. The business model there is that you spend loads of money today on building a network. Once everyone is in the network, they’re trapped, and your profits explode higher, showering investors with cash (at least, that’s the plan).
Electric-car maker Tesla is one example of this in progress (once everyone owns an electric car, Tesla will have the dominant market position and will be able to sell the owners downloadable upgrades, etc etc). Meanwhile, Amazon is an example of a company that has already succeeded at this to a great extent.
Older economy stocks – energy being perhaps the most pertinent example – might make money today (or at least produce cashflow), but they have a business model that will only ever grow at a certain rate. And with energy stocks, the current belief – which may be right – is that they face inevitable decline.
So you can buy a tech stock, which will produce a near-infinite sum of money at some point in the as-yet-undetermined future; or you can buy an energy stock which will produce a predictable amount of money today and a declining pile into the future.
If interest rates and inflation are high, you might well favour the latter. You’ll take your jam today – the future is too uncertain. But if rates and inflation are low, the huge pile of money in the future from the tech stock is far more attractive than the little and declining pile of money you’re getting today from the energy stock.
To be clear, I’m not making any judgement either way on which you should invest in. (It does feel that we’re at extreme levels but we have been for some time). I’m just trying to explain what I think is going on in the market’s head right now.
Markets are probably right to bet on interest rates staying low. That’s almost a given – central banks won’t let them rise if they can help it (it’s called financial repression).
What they are perhaps overly confident about though, is the idea that inflation won’t become a problem. And that’s what would most likely drive a shift in regime. When might that happen? I don’t know. But I am pretty sure that the coronavirus pandemic has brought the day closer.
We’ll be writing a lot more about this in MoneyWeek magazine over the rest of this year. If you don’t already subscribe, now’s the time to do so – get your first six issues free when you subscribe here.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
James Halstead drives profits: should you buy?
James Halstead will rebound from a weak patch, while tax changes would be a buying opportunity
By Jamie Ward Published
-
Premium Bond winners – who won the November £1 million jackpot?
NS&I unveils November’s Premium Bond winners. Who bagged the jackpot and what other prizes are on offer?
By Vaishali Varu Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated