S&P 500 moves above 5000, attracting investor capital while reducing gold’s allure

Yesterday the Standard & Poor’s 500 index hit a new milestone trading above 5000 points for the first time in history. Equity traders witnessed another record today with the S&P 500 closing out the week above 5000. Optimism regarding a revision of the December inflation data revealed that inflationary pressures are even lower than the earlier data suggested. 

While the S&P 500 has experienced a stellar performance taking it to its highest value in history, it must be noted that this stellar performance is not broadly based but rather the product of only a handful of corporations.  According to Yahoo Finance, the returns from the “big four” corporations alone account for approximately 70% of the S&P 500’s gains this year.

At the same time, market participants have witnessed gold trading under pressure since the last week in December. Gold futures closed at $2089 on December 26 and have lost value for five of the last six trading weeks. Today, gold lost $9.10 or 0.45% on the last trading day of the week.  This week gold lost $14.70 or -0.72% and is currently fixed at $2039.10. While recent declines in gold were highly influenced by dollar strength and higher treasury yields, investors must acknowledge the risk-on environment created by a handful of major tech companies.

Investors effectively look to move their capital to assets that provide the greatest potential for a high return while also offering a level of risk that is acceptable to them. US equities can contain tremendous risk, which is why the asset classes are titled risk-on. Asset classes that offer stable but low returns such as bonds are a strong alternative when US equities are trading under pressure. 

The haven asset class is structured around investments that tend to perform well or increase in value during times of market turbulence and or geopolitical tension. Intrinsically, gold acts as a haven asset and provides a place of refuge or sanctuary during turbulent economic and political times, during which they are expected to retain or increase in value.

The Cambridge Dictionary lists gold as an example of a haven asset. “Gold bullion is becoming many central banks haven again, and it will again become the public's haven of choice in the coming years.”

However, the overwhelming capacity of a handful of corporations specializing in the advancement of technology has shifted market participants' focus away from the safety of a haven asset, or the security of a low-risk return government bond.

Looking at gold prices over the last quarter of 2023 major geopolitical events have resulted in market participants allocating their capital into gold and cash (the dollar). However, recent advances in technology regarding AI have elevated the profits and continued profit potential for a handful of companies. As such, it is a logical assumption that market participants will continue to allocate a large percentage of their capital to companies such as Nvidia, Meta, Amazon, Microsoft, and Apple.

Wishing you as always good trading,