Why Gold Stopped Being a Commodity (AllianceBernstein’s Inigo Fraser Jenkins) | #649

Episode Summary

Executive Summary: Inigo Fraser-Jenkins argues for US equity exceptionalism, but not dollar exceptionalism: US firms benefit from AI adoption, favorable demographics, strong profit margins, and tax/regulatory advantages, while the dollar faces fiscal, geopolitical, and de-dollarization risks. He sees a lower-return, higher-inflation world where bonds may no longer reliably hedge equities, making gold, selected commodities, healthcare, and some Bitcoin exposure more relevant portfolio diversifiers.

Main Topics: US equity exceptionalism vs. dollar exceptionalism (Priority: 5/5): Fraser-Jenkins separates the case for owning US stocks from the case for owning the dollar. He supports a strategic overweight to US equities due to AI adoption, demographics, and profit-share advantages, but is more cautious on the dollar because of debt, geopolitics, and reserve-currency fragility. AI, productivity, and labor displacement (Priority: 5/5): AI is expected to raise productivity, but his base case is that it offsets demographic and climate-related growth drags rather than creating a large extra growth boom. Near term, he expects some job dislocation because AI is concentrated in sectors with high unionization and different labor dynamics than past automation waves. Valuations, margins, and lower future returns (Priority: 4/5): He worries about valuation, using long-term measures like Shiller P/E to argue US equities are fully valued. He expects returns to remain positive in real terms but lower than recent decades, with margins likely staying high and perhaps rising further from AI-driven automation. Bonds as weaker diversifiers (Priority: 5/5): He argues long-duration government bonds may no longer provide the reliable stock hedge they did during the disinflationary era after the mid-1980s. Higher inflation volatility, fiscal stress, and changing pension flows weaken the classic 60/40 setup. Gold as money, not just a commodity (Priority: 5/5): Gold is presented as a strategic portfolio hedge against dollar weakness, geopolitical risk, and inflation regime change. He frames gold as a money-like asset with zero correlation to equities rather than a cyclical commodity, and sees it as a core non-fiat allocation. Portfolio construction in a scarcer-diversification world (Priority: 4/5): Because stocks, bonds, and the dollar may all behave less reliably than in the past, investors may need more illiquidity tolerance, concentration, and exposure to real assets. He emphasizes real return targets over nominal targets. Sector views: healthcare, energy, base metals, and soft commodities (Priority: 3/5): Healthcare stands out for demographics, AI upside, and relative valuation. Energy and commodities regain importance as inflation protection and real-return sources. He also flags soft commodities and food prices as a coming area of concern.

Key Arguments: US equities deserve an overweight because AI adoption, labor flexibility, and longstanding profit-share expansion should disproportionately benefit US firms. The dollar is more vulnerable than US equities due to high public debt, rising debt-service burdens, geopolitical weaponization of the dollar, and attempts at de-dollarization. AI’s central macro effect may be to preserve recent growth rates rather than create a dramatic new growth regime. Near-term AI-driven automation could cause job dislocation because the sectors most exposed to AI differ from past automation targets and have higher unionization. Valuations matter: on long-horizon measures, US equities look fully valued, implying lower expected future returns even if earnings remain strong. Government bonds are less likely to be a dependable equity hedge in the future because the post-1985 disinflation era was historically unusual. Gold should be treated as a strategic money-like diversifier with roughly zero equity correlation, not as a commodity with a price target. Higher and more volatile inflation is likely from deglobalization, debt monetization risk, climate, and supply shocks, though not necessarily runaway inflation. Healthcare is attractive because demographics support demand, AI may improve efficiency, and valuations remain reasonable relative to history. Energy and broader commodities have renewed value in portfolios as real-return and inflation-protection assets. Investors should focus on real returns rather than nominal benchmarks, because higher equilibrium inflation makes nominal return targets less meaningful.

Data Points: US working-age population growth: basically flat over the next 10 to 15 years - Used as a demographic support for US equity exceptionalism versus Europe and China Europe working-age population: about 0.5% per annum decline - Projected demographic headwind compared with the US China working-age population: close to 1% per annum decline - Illustrates much weaker demographic base growth outside the US US firms’ effective tax rate trend: almost a monotonic line down over decades - Cited as a driver of US profit-share and earnings superiority 10-year government bond/equity correlation: negative over the last 20+ years, but positive for most of the prior 200 years - Supports the argument that bonds’ diversifying role was historically unusual Historic stock-bond correlation: around 0.2 over the 100-year average - Used to argue bonds still diversify somewhat, but far less than in the recent era Post-1985 market regime: incredibly special period - Characterized by benign inflation, high starting yields, labor-force growth, and strong real returns Strategic inflation view: around 3% ("high 2s, 3%") - His base case for a higher but still anchored long-run inflation regime Threshold where equities stop behaving like a real asset: above 4% inflation - Portfolio implication for inflation protection and asset behavior Long-run real return on gold: about 0.6% per annum - 150-year historical estimate used as a baseline for gold allocation thinking Suggested real return assumption for gold: about 1% real - Adjusted upward given BRICS/China demand and macro regime change AI productivity estimate from current academic research: about 1% per annum - Average of recent forecasts, but with very wide disagreement Historical steam engine productivity uplift: about 0.8% per annum - Used as an analog for AI’s possible productivity impact Demographic growth drag in the US vs. post-1980: about 0.8% per annum less - Part of his estimate that AI may only offset structural growth headwinds Potential aggregate growth drag from climate: a few tens of basis points - A rough estimate of climate-related growth impact

Pivotal Quotes: "I would like to take the view ... to defend US equity exceptionalism, but to decline to defend dollar exceptionalism." — Inigo Fraser-Jenkins: Opening distinction between the case for US stocks and the case for the dollar "Gold is actually no longer a commodity. Gold is money in this kind of environment." — Inigo Fraser-Jenkins: Explaining why gold deserves a distinct strategic allocation role "AI presumably does raise productivity, but the central case of that is that it just keeps us running at the growth rates that we've seen in recent decades, not an extra uplift of growth." — Inigo Fraser-Jenkins: His base case on AI’s macro impact

Implications: Investors may need to rethink 60/40, prioritize real returns, and diversify with gold, commodities, healthcare, and liquidity-aware risk assets. US equities still look best in a global portfolio, but the dollar and long bonds appear less dependable.