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

Fraser-Jenkins separates the debate around exceptionalism into two distinct issues: US equity exceptionalism versus dollar exceptionalism. He makes a strategic case for overweighting US equities based on several factors: historical evidence that US firms exploit IT advantages better than competitors, favorable demographics with a flat working-age population compared to declines in Europe and China, and an extraordinary and sustained growth in profit share of GDP for US firms over decades. However, he declines to defend dollar exceptionalism, citing fiscal sustainability concerns, geopolitical weaponization of the dollar following Russia's invasion of Ukraine, and capricious policymaking that incentivizes de-dollarization efforts among BRICS nations.

On valuations, Fraser-Jenkins acknowledges that US stocks appear fully valued on a Shiller PE basis, but argues that valuation alone is a dangerous guide when earnings growth can support markets. He contends that multiples cannot expand further, so returns will be lower in real terms than historically, but still positive. Critically, he argues that most assets today are relatively expensive across the board, implying a lower-return environment overall.

Fraser-Jenkins makes a striking case that bonds will not perform their historical diversifying role going forward. He notes that while equities and bonds had a negative correlation of -0.4 over the past 20 years, the 200-year average correlation is actually positive at approximately +0.2. This structural shift reflects that the post-1980s period was unusually favorable for bonds due to benign inflation, high starting bond yields, and strong labor force growth—conditions that are reversing. He identifies deglobalization, high debt levels with monetization risks, and climate change as structural forces pointing toward higher equilibrium inflation without corresponding growth, which fundamentally flips the equity-bond relationship.

On gold, Fraser-Jenkins takes a provocative position: gold is no longer a commodity but rather money in the current environment. He defends gold as having zero correlation with equities across all inflation regimes and stresses this correlation should remain zero theoretically, though temporary abnormalities occur due to flow dynamics. He acknowledges the difficulty in providing price targets for gold but proposes a long-run real return target of approximately 1% annually (versus the historical 150-year average of 0.6%) adjusted upward for BRICS central bank purchasing. He positions gold as an essential diversifier in an environment where bonds no longer fulfill that role, alongside strategic equity overweighting.

On artificial intelligence and productivity, Fraser-Jenkins expresses skepticism about forecasting long-run productivity gains, citing the TMT bubble as evidence of poor forecasting ability. His central case reverses the typical AI analysis: rather than AI creating an uplift to growth, he argues the best realistic scenario is that AI generates approximately 1% additional annual productivity growth, which merely compensates for growth headwinds from demographics (0.8% annual decline in US working-age population growth versus post-1980 trends), climate impacts, and other structural factors. He benchmarks this against historical precedents like the steam engine, which delivered 0.8% sustained productivity growth. His analysis implies that maintaining current growth rates would require AI to match steam engine-level productivity improvements, not exceed them.

On labor markets, Fraser-Jenkins distinguishes between the long-term historical pattern (where automation destroys jobs but more are created elsewhere) and near-term sector-specific disruption. He notes that AI's largest expected impact is on the services sector, which has high unionization rates, differing from past automation in auto and heavy industries. This suggests near-term job dislocation before any long-term labor market rebalancing.

Fraser-Jenkins identifies healthcare as a strategically attractive equity sector, combining demographic tailwinds that support pricing power, plausible AI benefits, and valuations that—despite recent outperformance—remain in the lower half of their 20-30 year range. He also highlights the historical role of survivorship bias in equity return analysis, noting that in 1899 the six to seven largest markets besides the US and UK went to zero sometimes multiple times, cautioning against assumptions that past US success is destiny.

On inflation, Fraser-Jenkins forecasts higher equilibrium inflation (high 2% to 3% range) due to deglobalization, debt dynamics, and climate factors, but stops short of unanchored inflation forecasts. He notes that inflation above 4% becomes problematic for portfolio construction because equities stop behaving as real assets. He emphasizes that investors must shift focus from nominal return targets to real return targets, as the low-inflation era that enabled nominal benchmarking is ending.