Profit From the 21st-Century “Gold Rush”

This post Profit From the 21st-Century “Gold Rush” appeared first on Daily Reckoning.

“What single word would you use to describe today’s AI investment plays?” The question was posed to me as I sat in on a panel discussion with Jim Rickards, Byron King, Dan Amoss and a few other influential minds in the investment community at the famous (or infamous) Watergate Hotel in Washington, the heart of the swamp.

As I’m sure you know, artificial intelligence (AI) has captured the attention of Wall Street and Main Street alike. Optimistic investors have driven shares of stocks tied to the AI trend sky-high (hello, Nvidia!).

And the euphoria is starting to resemble the levels of optimism surrounding the “dot-com” bubble which was at its peak when I started my investment career as a hedge fund manager at the beginning of this century.

Quite frankly, I’m concerned. Of course, there are some great use cases for artificial intelligence. The technology can be used to advance medical science, improving longevity and quality of life for patients.

Advances in AI can also help people better communicate around the world, overcoming language barriers. Companies are improving efficiency, reducing waste and freeing up people to focus on more important tasks and conceptual ideas.

It seems like every day there’s a new use case developed for this amazing technology. Yet many wise minds have been warning about the dangers of AI as it becomes more powerful and autonomous. These warnings are moving from the purely theoretical sphere, where they’ve been for decades, to the real world due to the pace of AI advances.

The classic question of what happens when the machines are smarter than humans has become a legitimate concern for society. And while the science of large language models and autonomous computing is outside of my area of expertise, I have my own concerns when it comes to AI investments.

The word I used in the panel discussion was “bifurcation” — because there truly are two sides to the AI investment ledger. On one hand, you have a large number of AI stocks that have traded sharply higher thanks almost entirely to investor optimism.

Many of these stocks have no business trading at the price points they’re at, or at the valuations Wall Street has given these companies. Again, think dot-com stocks in the late ’90s. I’m concerned with the losses that unsuspecting individuals may suffer — in the same way investors were punished in late 2000 and 2001 as the dot-com bubble burst in spectacular fashion.

But at the same time, I’m hopeful about the gains that wiser investors can capture from this trend by investing in legitimate companies that are truly generating profits from the advances in AI technology.

My focus is on income investments. Today, I want to introduce you to an income play that directly benefits from AI but at the same time allows you to sleep at night knowing that your investment is safe — and not subject to the wild swings that will surely characterize the AI stock market over the next several years.

I’m talking about “pick and shovel” plays in the AI market. What do I mean by pick and shovel plays? It goes back to the great Gold Rush of the late 1840s.

It’s been well documented that the real winners of the 1849 Gold Rush were the outfitters that sold “picks and shovels” to gold speculators. Regardless of whether these miners struck gold or not, the general stores, feedstock providers and other supporting businesses made out like bandits.

That concept has been revisited over and over in different areas of the economy and financial markets. Whenever there is a manic or speculative development (like the dot-com bubble, the housing euphoria of 2007 or today’s AI enthusiasm), there are certain companies that generate reliable profits serving a growing industry that may be considered speculative at best.

When it comes to AI, electricity has become one of the most important resources to drive this technology forward. It takes a tremendous amount of power to run the servers that process unbelievable amounts of data.

And on top of that energy, it also takes a tremendous amount of electricity to cool the AI data centers so the computer equipment doesn’t overheat and melt down. As more data centers are built, demand for power continues to grow.

In fact, industry analysts now project that electricity demand from data centers may grow by an annual pace of 13–15% through 2030. So by the end of the decade, data centers are projected to account for a whopping 7.5% of total U.S. electricity consumption.

That’s obviously very good news for the utility companies that provide power for these data centers. Demand for the company’s electricity is growing, and that demand should continue to increase over the next several years.

Meanwhile, the valuation that Wall Street places on utility stocks should also increase over the next year. You see, right now, interest rates are relatively high compared to what we have seen over the past two decades. As you know, the Federal Reserve has hiked rates in an attempt to slow the economy down and reduce inflation.

Higher interest rates can be a drag on dividend payers like consumer staples and utility stocks. That’s because when interest rates are high, income investors have other alternatives for generating much-needed cash flow. So capital that might have otherwise gone into dividend stocks is instead invested in bonds and other interest rate-sensitive assets.

But as we head into the second half of this year — and further into 2025, the likelihood of the Fed cutting rates is picking up. The Fed’s practically said it’ll be cutting rates. And that shifting dynamic is very favorable for utilities, especially those utilities stocks that pay dividends.

Once interest rates start to fall, that incentive to move capital away from dividend stocks will begin to reverse. And as more investors move capital out of bonds and other fixed-income products, and into dividend stocks, we should see prices for utilities move higher.

So there’s both a fundamental and a technical argument for owning quality utilities in today’s market, giving you a great chance to lock in a solid stream of income with the promise of investment gains as interest rates come back down.

The bottom line is select utilities should have much further to run as AI continues to drive demand for electricity. Want to capitalize on the 21st-century gold rush? You might want to consider investing in top utilities.

The post Profit From the 21st-Century “Gold Rush” appeared first on Daily Reckoning.

This story originally appeared in the Daily Reckoning . The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.