AI hype triggers double bubble warning as gold rally tests pensions

Bank for International Settlements warns of a potential double bubble in US stocks and gold as AI optimism fuels asset prices. The year 2025 has seen artificial intelligence become deeply embedded in daily life, even as big tech valuations soar. Gold has climbed about 60 percent this year to a record around 4,293 per ounce, while the S&P 500 has hovered near a high close of roughly 6,838. The BIS notes that gold and the S&P 500 are showing explosive behavior together, a pattern that historically precedes a market downturn.

Analysts say the AI driven rally centers on a handful of megacaps. The Magnificent Seven Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla have powered gains, with Nvidia up about 28 percent since the start of the year. Market watchers compare the move to the dot com bubble of the late 1990s when hype around the internet propelled valuations ahead of profits. While AI could be transformative, some investors worry that prices have already priced in outsized future profits, and any miss on earnings could trigger steep losses. The intensity of AI related bets is evident in portfolios where tech names form large portions of holdings. The BIS warning of a double bubble comes as stock markets and gold drift higher together, raising the risk that a correction in one could spill into the other.

Investors should check how much of their wealth is tied to the stock market and tech. About 73 percent of developed world stock market investment is in US stocks, and close to 20 percent is in the top US tech giants. If those concentrations fall, portfolios could suffer. Tools on many DIY platforms show top holdings; if the biggest weights are US tech, it may be time to rebalance toward other regions such as Europe, the UK, Asia, emerging markets and Japan. Alternatives to pure stock exposure include an equal weight approach such as the Invesco MSCI World Equal Weight ETF, which allocates holdings more evenly, or a global value style that tends to have less exposure to the Magnificent Seven such as the Redwheel Global Intrinsic Value fund.

SHIFTING AWAY FROM SHARES can help dampen volatility. Short-dated government bonds can provide ballast when stocks fall. Consider short-dated bond funds or ETFs such as the SPDR Bloomberg UK Gilts 1-5 Years ETF, which has posted a modest three year return. The aim is to balance risk and liquidity while preserving long term growth potential. Andrew Wilson, chief investment officer at Lockhart Capital Management, suggests backing short-dated government bond funds as a defensive layer.

Finding the right mix depends on risk tolerance and time horizon. For someone nearing retirement a starting point might be a 60 percent shares and 40 percent bonds or alternatives split. For younger savers a higher share allocation may be appropriate to ride out volatility. The portfolio mix is also about diversification across sectors and regions. Infrastructure and property can provide ballast, with examples such as 3i Infrastructure up 29 percent over three years and AEW UK Reit up 39 percent. For broader exposure to property, the iShares UK Property ETF is up about 4.84 percent over three years.

Gold can still shine as a diversification tool. After a strong rally, some investors see value in holding a modest allocation to bullion as a hedge against central bank missteps and inflation. Analysts suggest around 5 percent of a portfolio in gold. The iShares Physical Gold ETF tracks the gold price without owning the metal directly, and VanEck Gold Miners offers exposure to mining firms. Over three years the funds have gained about 138 percent and 44 percent respectively.

Portfolio protectors exist for investors seeking to guard against a market downturn. All weather multi asset investment trusts aim to perform in down markets. Ruffer Investment Company and Personal Assets Trust have reputations for countercyclical performance. Ruffer is down about 1 percent over three years and has top holdings including oil major BP and Chinese retailer Alibaba. Personal Assets Trust is up about 16 percent over three years and holds gold bullion alongside Unilever and Visa.

What are you doing to protect your finances from a potential crash? Readers can share ideas via the Money desk at money@mailonsunday.co.uk.