International Settlement Bank (BIS) issued a quarterly report on Monday (December 8th) warning that this year’s surge in gold prices and the strong growth of the U.S. stock market have displayed typical characteristics of asset bubbles. The key driving force behind this surge is retail investors. BIS cautions that retail investors are pushing gold and U.S. stocks into the “bubble zone,” increasing the risk of market disorderly reversals and posing a challenge to global financial stability.
The report points out that this year’s rise in gold prices has been driven by a variety of factors. In addition to the demand for safe-haven assets caused by inflation and the soaring global debt, central banks around the world have been major influencers by making large-scale gold purchases for three consecutive years. Since 2022, central banks have been buying around 1,000 tons of gold annually, reaching historically high levels.
It is worth noting that due to the rapid appreciation of gold prices, some central banks have been forced to sell part of their gold holdings to maintain their asset allocation ratios, reflecting that the market has entered a highly overheated stage.
BIS emphasizes that over the past three months, funds flowing into gold and U.S. stock funds have mostly come from retail investors, while institutional investors have been reducing their holdings in U.S. stocks while maintaining their gold allocations. This reversal in fund structure has made the market more emotional.
Retail investors have a characteristic of chasing highs and selling lows, and tend to follow the “herd effect.” Once the market trend reverses or panic sets in, they immediately withdraw funds, causing a sell-off wave and drastic price fluctuations. Therefore, BIS believes that the increasing influence of retail investors in the gold market may “threaten future market stability.”
However, on the other hand, several investment banks such as Goldman Sachs and the World Gold Council (WGC) still maintain a bullish outlook on next year’s gold prices.
Goldman Sachs’ survey of over 900 institutional investors revealed that 38% of respondents indicated that central bank gold purchases are the main driver of gold price increases. Central banks worldwide favor gold because of its high liquidity, absence of default risk, and suitability as a neutral reserve asset. The World Gold Council also believes that monitoring central bank gold purchases and changes in recycling volumes remains a focus.
In terms of U.S. stocks, the S&P 500 index has risen by 17% this year, while the Nasdaq index has risen by 22%, with the rally primarily concentrated in a few major tech companies with expertise in artificial intelligence (AI), including chip, cloud, and platform companies. BIS states that the stock valuations of large tech companies have become significantly overvalued, and the market’s excessive focus on AI prospects has made the overall structure of the U.S. stock market more fragile.
Recently, the International Monetary Fund (IMF) and the Bank of England have warned of the bubble risk in AI concept stocks. Global decision-making institutions are generally concerned about the overheated market, as a significant price correction could bring unforeseen risks to the stock market and the economy.
BIS points out that this is the first time in at least 50 years that both gold and U.S. stocks have simultaneously entered the bubble zone. Historically, gold prices have experienced cyclical ups and downs. For example, in 1980, influenced by inflation and the Iran oil crisis, gold prices peaked. After the 2008 financial crisis, gold prices also surged and reached a peak of $1830 per ounce in September 2011 but eventually fell significantly.
The report emphasizes that “bubble endings are usually accompanied by rapid and intense corrections,” so investors and policymakers should be particularly vigilant about the market risks driven by retail funds.
(This article is for general information reference only and is not intended as a recommendation. The Epoch Times does not provide investment, tax, legal, financial planning, real estate planning, or other personal financial advice. For specific investment matters, please consult your financial advisor. The Epoch Times does not assume any investment responsibility.)