S&P 500 Stocks and Gold Haven’t Rallied Like This for Decades. Why It’s a Warning.

Gold prices have climbed above $4,000 an ounce for the first time. (Photo by DAVID GRAY/AFP via Getty Images)

Key Points

• The S&P 500 has risen more than 13% and gold prices have rallied almost 26% in the last six months.
• Research indicates both the S&P 500 and gold have entered “explosive territory” simultaneously for the first time in 50 years.
• Increased retail investor participation in both gold and U.S. equities could heighten market volatility.

U.S. stocks and gold have enjoyed “explosive” growth in a type of lockstep that has not been seen in 50 years, according to new research. It may be a sign of an asset bubble—or at least raise the risk of volatility.

The S&P 500 has risen more than 13% in the last six months, while gold prices have rallied almost 26% over the same period, with both now lingering near record highs.

“The sharp price increases of both assets…have attracted substantial investment flows from retail investors and sparked a debate over the possibility of asset price bubbles,” researchers at the Bank for International Settlements (BIS) wrote in research published on Monday.

The BIS is a global financial institution owned by constituent central banks, including the Federal Reserve.

A possible bubble in the stock market, referring to a period of rapid price growth followed by a “burst” or sharp correction, has been on the minds of investors for months. But most fears have centered on technology stocks that have benefited from trends in artificial intelligence —not the entire stock market itself, let alone gold as well.

Market bubbles can be difficult to identify and predict, as the BIS researchers noted, though analysts often fall back on statistical approaches that focus on “explosive behavior” in how asset prices move.

A widely used statistical measurement of an asset’s so-called explosiveness “suggests that both the S&P 500 and the price of gold have entered explosive territory in recent months,” the BIS team wrote. “The past few quarters represent the only time in at least the last 50 years in which gold and equities have entered this territory simultaneously.”

“Following its explosive phase, a bubble typically bursts with a sharp and swift correction,” they added.

Besides explosive price action, bubbles also typically exhibit other characteristics, including a relatively increased presence of retail or individual investors chasing the trend.

“At times of media hype and surging prices, retail investors can be lured to riskier assets that they would normally shun, compounded by herd-like behavior, social interactions and fear of missing out,” the BIS team wrote.

Retail participation is certainly being seen right now, according to the BIS— perhaps most surprisingly in gold, a stalwart inflation hedge which has flitted in and out of fashion among investors for decades.

Flows into gold exchange-traded funds (ETFs) have left them trading at a premium relative to their net asset value this year, according to BIS analysis, which suggests strong buying pressure from retail. Fund flow data also points to retail investors pouring money into U.S. equities, BIS said.

Even if bubble fears are misplaced—remember, statistical observations are just that, not ironclad predictions—this trend is still noteworthy. If retail investors are becoming more dominant in terms of market dynamics, it could exacerbate volatility and downward choppiness irrespective of whether it is a real bursting bubble or correction.

“[Retail investors] could threaten market stability down the road, given their propensity to engage in herd-like behavior, amplifying price gyrations should fire sales occur,” said the BIS researchers.

Write to Jack Denton at jack.denton@barrons.com