AI optimism faces profitability test as gold tries to find a floor

Laurence Booth, global head of markets at CMC Markets, discusses the issues surrounding AI at the moment.

He said: “Profit-taking has continued on Wall Street and across Asian equity markets, with scepticism growing particularly in the technology sector.

“Cracks are increasingly appearing in the AI growth story following reports that OpenAI’s annualised revenues are running below the levels previously signalled.

“This is bringing a question back into focus that was largely overlooked during the rally: when will the enormous investments in data centres and AI infrastructure actually begin to pay off?

“Investors are increasingly distinguishing between the technological potential of AI and its commercial profitability. This does not necessarily mean that the AI boom is over, but the era of almost unlimited investor optimism may be drawing to a close. The risk of disappointment is therefore growing, particularly among highly valued semiconductor companies, and some of the biggest cloud and technology businesses.

“The amount of money required to build the next generation of AI infrastructure only adds to that scrutiny. With bond yields still elevated, financing vast investments in chips, data centres and power is expensive. Investors are likely to become increasingly focused not simply on how much companies are spending, but on how quickly that spending produces revenue and profits.

“Gold is also trying to stabilise after a difficult period. Prices have rebounded towards $4,200 as the dollar and bond yields have eased, while China’s return from Golden Week could add some support from physical demand.

“That bounce is encouraging, but it is still too early to call it a change in trend. Gold has repeatedly come under pressure when US yields and the dollar have moved higher, even with geopolitical uncertainty in the background. For now, it looks more like the market is testing whether a floor has formed than the start of a convincing new move higher.

“High bond yields are also running through both stories in different ways. Investors are becoming more selective about where they put their money and more demanding about the returns they expect.

“In AI, that means greater scrutiny of whether huge levels of investment will ultimately pay off. For gold, it means any recovery still has to compete with the attraction of higher yields elsewhere.”