On Monday, January 27th a Chinese startup called DeepSeek triggered a market rout on Wall Street which resulted in massive losses. DeepSeek is an AI-powered chatbot that has demonstrated capabilities on par with OpenAI for a fraction of the cost and using significantly less energy. The Wall Street journal called its debut a “bloodbath” for the tech sector that wiped out a trillion dollars from the stock market’s value.1https://www.wsj.com/finance/stocks/the-day-deepseek-turned-tech-and-wall-street-upside-down-f2a70b69
DeepSeek is now the #1 iPhone download unnerving tech investors and shining a light on U.S. AI capabilities and stock valuations. President Trump called it a “wake up call” for U.S. companies competing in the space.
“DeepSeek, a one-year-old startup, revealed a stunning capability last week: It presented a ChatGPT-like AI model called R1, which has all the familiar abilities, operating at a fraction of the cost of OpenAI’s, Google’s or Meta’s popular AI models. The company said it had spent just $5.6 million on computing power for its base model, compared with the hundreds of millions or billions of dollars US companies spend on their AI technologies.”2https://www.cnn.com/2025/01/27/tech/deepseek-stocks-ai-china/index.html
A Deep Dive into DeepSeek
DeepSeek “Into the Unknown” is the new Chinese chatbot’s mantra. It is an AI product that functions like ChatGPT using a phone app or computer and permits users to ask questions in a query field which it can answer in either Chinese or English.
According to India Today, DeepSeek has two models, DeepSeek-V3 is more a general-purpose model while DeepSeek-R1 is a deep AI reasoning model with deep learning capabilities that can solve more complex tasks. Both models use less power and become smarter over time.
“What sets DeepSeek apart from its competitors is the use of a Mixture-of-Experts (MoE) architecture. This unique design ensures that only a small portion of the model’s parameters are active at any given time, reducing the amount of computing power required to process queries. Additionally, the AI models improve themselves through a trial-and-error learning process, which mimics human learning. This approach has helped DeepSeek gain a reputation for rapid advancement.”3https://www.indiatoday.in/technology/news/story/deepseek-ai-what-is-it-how-it-works-is-it-better-than-chatgpt-everything-to-know-2671407-2025-01-28
DeepSeek poses a direct challenge to U.S. AI firms and AI-related companies that have already spent millions on architecture and committed billions more to improving and scaling AI initiatives prompting questions of overspending.
The AI Bubble Hits a Pin
DeepSeek caught investors off guard by simply doing far more with far less — and subsequently wiping out over a trillion investor dollars in just hours. The app is more efficient and by some accounts more intelligent than more well-funded applications like Meta AI, Claude, and Gemini.
According to Bloomberg, the DeepSeek phenomenon is fanning concerns among investors over whether US tech stocks, AI stocks, and chip stocks deserve their sky-high valuations.
“The Nasdaq 100 is trading at 27 times projected profits in the next 12 months, almost a quarter above its 10-year average. Nvidia, which has led the way on AI technology, has a valuation multiple of 32.”4https://www.bloomberg.com/news/articles/2025-01-27/nasdaq-futures-slump-as-china-s-deepseek-sparks-us-tech-concern
The Warren Buffet Indicator, which assesses how expensive the stock market is via a ratio of total US stock market value divided by GDP — just hit an all-time high. According to The Motley Fool, the same ratio hit an all-time high in 2000 prior to the explosion of the dot.com bubble.
“If Buffett’s analysis from over two decades ago is still on point, the stock market is again looking downright bubbly. Remember that he cautioned in 2001 that if the ratio that now bears his name approaches 200% investors are “playing with fire.” What is the level of the Buffett indicator today? Over 200%.”5https://www.fool.com/investing/2025/01/28/the-buffett-indicator-just-reached-an-all-time-hig
Gold Thrives in a Frothy Market
Wall Street’s reaction to DeepSeek is characteristic of a frothy stock market and the frenetic nature of AI market dynamics. A frothy market is characterized by an almost irrational acceleration of stock prices devoid of fundamentals and detached from justifiable valuations.
According to the Corporate Finance Institute, it has certain key criteria:
“A frothy market typically occurs when market participants are overconfident in existing market conditions and, as a result, bid up the underlying asset prices to a point where it is decoupled from its true intrinsic value. It is important to note that the true intrinsic value of assets is unobservable, so there is not a benchmark to compare against to determine the level of existing market froth. Key signs of a frothy market include: (1) asset prices rising in a parabolic manner over a short time period, and (2) asset prices rising regardless of their perceived valuation.”6https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/frothy-market
Such markets are dangerous for investors, financial portfolios, and retirement holdings as evidenced by the frothy dot.com bubble of the late 1990s, the 1997-2006 housing bubble, and the more recent cryptocurrency bubbles.
According to James Mackintosh, Senior Markets Columnist at the Wall Street Journal, the current market feels “toppy,” and it has him scared:
“When investors are wildly optimistic, it is much harder for the market to rise—everyone’s already got a lot of stocks—and much easier for it to fall on any hint that they might be wrong. I don’t know what the trigger might be, but it doesn’t need to be much … This feels like a good time to take some money off the table.”7https://www.wsj.com/finance/stocks/why-this-frothy-market-has-me-scared-295c07c3
With overvalued stocks facing the risk of correction, gold is a critical asset for wealth protection and portfolio diversification. Gold is coming off a record-breaking year (2024) fueled by widespread geopolitical risks, central bank demand, U.S. election uncertainty, and a weakening U.S. dollar.
With the artificial intelligence bubble now seemingly on the brink of bursting, look for gold to continue its run as a strategic safe haven asset and a critical and reliable store of value.
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1 https://www.wsj.com/finance/stocks/the-day-deepseek-turned-tech-and-wall-street-upside-down-f2a70b69
2 https://www.cnn.com/2025/01/27/tech/deepseek-stocks-ai-china/index.html
5 https://www.fool.com/investing/2025/01/28/the-buffett-indicator-just-reached-an-all-time-hig
6 https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/frothy-market
7 https://www.wsj.com/finance/stocks/why-this-frothy-market-has-me-scared-295c07c3
