By Philip Lawlor, managing director, global markets research
After the market rout in late 2018, our Market Maps report for January showed a strong rebound in a wide range of risk-on assets. The rise was almost a mirror image of December’s falls: cyclical stocks outperformed defensive, US small caps had their best start to the year in more than 30 years, and appetite for emerging markets increased.
But one anomaly in the abrupt change from risk-off to risk-on was gold—traditionally seen as a defensive asset—which has continued to appreciate since the beginning of Q4.
As the chart above shows (with the gold price rebased and inverted), the price of the metal rose in January, even as a wide range of risk-on assets, such as stocks and copper, rose.
There may be supply-side reasons for this. Or, on the demand-side of the equation, central banks are increasing purchases as a hedge against significant US dollar deposits (FT paywall). And in the months ahead it is possible that the data may show that industrial demand is rising, or that jewelry use is increasing in India or China, its biggest markets.
A less bullish analysis would be that gold’s appreciation is an indicator that the risk assets rally in January was optimistic. It was underpinned by dovish Fed comments, easing US-China trade tensions, and better-than-expected US Q4 earnings, but if we are past the peak of the economic cycle, the demand for gold may be driven by more than just a result of weaker supply, or Central Bank demand.
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