The AI ‘Gold Rush’ – picks and shovels

Today’s gold rush is being driven by the boom in AI

The term ‘picks and shovels’ originates from the California Gold Rush of the 1840’s.

Where the real fortunes were not made by the prospecting gold miners, but by those selling the tools and supplies necessary for mining.

Today’s gold rush is the boom in AI – artificial intelligence driven by the massive investment by the American AI hyper-scalers in data centres. For example, Alphabet, Microsoft, Amazon, Meta and Oracle are forecast to undertake £700bn of capital investment in 2026 alone. According to US government data, monthly spending on data centre construction in the US hit $50 billion in April!

While the share prices of many AI companies have soared in the past 12-18 months, so too have the share prices of many traditional industrial engineering, utility and mining companies that supply the modern-day equivalent of ‘picks and shovels’ for data centres.

AI data centres are more complex than traditional cloud storage data centres which has led the ‘Big Tech’ companies to seek specialist suppliers. For example, AI servers must be more tightly linked together, increasing the need for advanced cabling and optics. AI data centres also require much greater amounts of electricity to power them, fuelling demand for specialised power management, high-voltage electronics and cooling technologies as well as electricity! Air conditioning and liquid cooling technologies to prevent AI chips from overheating are also in demand. Meanwhile, there has been a surge in orders for gas turbines due to the demand for back-up or off-grid power supplies.

Many traditional engineering businesses have repivoted activities towards providing AI datacentre equipment to benefit from the AI datacentre gold rush. Part of the appeal is also the faster speed with which AI data centre investment projects are moving compared with traditional industrial clients.

The billion-dollar question is, can the wave of AI datacentre investment continue?          

The answer is nobody really knows, but AI fever continues to grip global stock markets. However, the escalating ramp-up in capital expenditure is a growing concern. Nonetheless, the management teams of many traditional engineers, utilities and miners believe that AI demand is a long-term structural growth trend rather than a short-term cycle. In the meantime, many are making hay while the sun shines and profiting from selling plenty of ‘picks and shovels’ to the AI gold rush miners!

 

What have we been watching?

 

Fragile peace in our time!

Encouraging progress in the US-Iran peace talks in Switzerland, mediated by Qatar and Pakistan, has seen both sides agree to a roadmap towards a potential deal within 60 days. Technical working groups have been formed and a mechanism has been established to de-escalate the conflict in Lebanon, while a direct communication line has been set up aimed at avoiding incidents and keeping the Strait of Hormuz open. This morning Brent oil has moved lower, falling to below $80. 

This has come as welcome relief to markets this morning after Saturday’s confusion, when Iran suggested the Strait of Hormuz was now closed again after Israeli attacks in Lebanon and it briefly stepped back from talks following renewed threats from President Trump, who reiterated that the US would strike again if Iranian-backed proxies in Lebanon continued attacks on Israel. While difficult discussions remain ahead for the US and Iran, the situation in Lebanon looks to be the most challenging. The head of Hezbollah has demanded that Israel leave Lebanon, while PM Benjamin Netanyahu has said that Israel will not give up any of the territory that it has occupied!

 

In the UK, this morning has seen the resignation of PM Sir Keir Starmer following leadership rival Andy Burnham’s by-election win last week. If, as expected, Andy Burnham becomes the new PM by September, then this will be the UK’s seventh PM in ten years, or since Brexit! The key for markets now is who Andy Burnham will appoint as Chancellor, with a high-spending candidate like Ed Miliband causing concern, although there are rumours that Yvette Cooper or Wes Streeting could be more market-friendly options. Only time will tell, but previous new PMs and Chancellors have arrived in post with great hopes, but then the lack of economic growth and the financial realities hit. As was clear from the public sector borrowing data last week, the fiscal constraints facing the UK remain unchanged, whoever is PM or Chancellor!  The 10-year Gilt yield spiked 0.98% to almost 4.85% on PM Sir Keir Starmer’s resignation announcement.        

 

In the US, while inflation expectations have fallen following the tentative US-Iran peace deal, the Federal Reserve’s (Fed) latest meeting last week led to a more ‘hawkish’ shift by markets on interest rate policy. Half of the eighteen Fed officials signalled that there should be an interest rate increase this year, although new Fed Chair Kevin Warsh did not submit a view this time. However, the new Fed Chair did reiterate the Fed’s inflation target, pledging to return inflation to target after five years. This led the market to price expectations for a Fed rate hike by December with the likely increase shifting up from almost 0.2% to approaching 0.4%.              

 

The Bank of Japan delivered a 0.25% interest rate increase as expected, taking its policy rate to a post-1995 high of 1%.

Finally, is the UK PLC up for sale? Sadly, a trend which has gathered pace since Brexit. Overseas buyers are snapping up ‘cheap’ British companies at a record pace. According to the London Stock Exchange, a renewed burst of deals has pushed the value of acquisitions by foreign buyers to £128bn so far this year, more than triple the level in the same period last year. Compared with the US, which recently saw the record SpaceX IPO, the UK has seen little new issue activity to refill the hopper as UK companies continue to disappear from the market.

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