Do you have a “.com” suffix in your name? If yes, we will invest in you. No matter that you never made any money. You have to gain in value, anyway! This is how people thought during the dot.com bubble. Investors were excited and bought many companies. People started to quit their jobs and engage in full-time day trading. Stock values grew. For example, Webvan.com, an online grocery business, was valued at $1.2 billion at its peak. However, one year and half later, the company bankrupted.
The dot-com bubble was, thus, a price bubble related, like many bubbles, to the new technology, i.e. the rapid increase in the usage and adaptation of the Internet. However, the stock purchase had to be financed somewhat. Indeed, the internet bubble was developed because the new money created by the Federal Reserve went through the banking system to online companies and NASDAQ stock exchange. The easy monetary policy and cheap capital combined with psychological factors helped to fuel the bubble.
Let’s look at the chart below. As one can see, the Nasdaq index surged from 719 in December 1994 to 5,048 in March 2000. It means about 600 percent increase!
Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, in $) and Nasdaq Index (green line, right axis) from January 1972 to September 2018.
Dot-com Bubble and Gold
How did gold behave during the dot-com bubble? Well, as the chart above shows, the yellow metal struggled in that period. As the funds flew into the stock market, gold was in the shadow. Another reason for disappointing gold’s performance was that the US dollar remained in the bull market.
However, when the bubble burst, and the Fed started to cut the federal funds rate in the response, gold started its impressive rally. Many people did not want to invest in the stock market anymore and they switched into the housing market (developing another speculative mania) and into… the precious metals market. The low interest rates, weak greenback and unsound US fiscal policy made gold shine.