Gold has experienced a dramatic rally between February and October 2024, rising more than 30%. After a prolonged period of stagnation, despite fluctuations in interest rates and risk assets, the price of gold’s unexpected surge seems tied to a structural shift in global demand—especially from central banks. However, this shift raises questions about the underlying forces at play.
The rally had paused in October 2024, which provided a brief moment of clarity in a market disrupted by the upcoming U.S. presidential election. But as 2025 began, gold surged another 10%, surpassing its previous all-time high set just three months prior. This raises the question: What does this mean for the broader global market?
Strong Demand for Gold
The simplest explanation for any asset’s price rise is increased demand, and recent trends suggest that gold’s price increase is driven by such demand. The Chinese central bank increased its gold reserves for the third consecutive month in January 2025, while inflows into gold-backed ETFs were substantial, amounting to $3 billion last month, following a weaker November and December. Notably, European gold funds saw their highest inflow in nearly three years, totaling $3.4 billion. These shifts can be attributed to China’s strategy of diversifying its reserves away from the dollar and Europe’s anticipation of U.S. tariffs.
Furthermore, macroeconomic factors are at play. Since mid-January 2025, real interest rates (adjusted for inflation, as represented by 10-year Treasury yields) have fallen by 25 basis points, reducing the opportunity cost of holding gold. The weakening dollar also supports the rising gold price, as it is priced in dollars. The mystery, however, lies in why the so-called “Trump trade,” which favored a stronger dollar and rising long-term rates, has recently reversed.
Reversal of the Trump Trade: A Complex Puzzle
The “Trump trade,” which had predicted higher U.S. tariffs leading to stronger dollar and higher interest rates, appears to be losing momentum. Three possible explanations have emerged for this reversal:
Slowing U.S. Economic Growth: Markets could be factoring in a slowdown in the U.S. economy, possibly influenced by the business cycle, Federal Reserve policy, or Trump’s fiscal policies.
Doubts About U.S. Tariff Policy: Markets may have initially anticipated tariffs that would drive the dollar and rates higher, but now believe the Trump administration may have been bluffing about the magnitude of these tariffs.
Overcrowding of the Trump Trade: The positions that supported the trade may have become overcrowded, and the market could be taking a pause before potentially resuming the trend.
Until U.S. tariff policies become clearer in the coming months, the exact cause of the reversal remains uncertain, but these potential explanations are central to the ongoing market analysis.
Emerging Market Concentration: A Growing Concern
Global equity markets are heavily influenced by the U.S., and within the U.S. markets, technology stocks—especially big names like Apple and Microsoft—dominate. This trend is similarly reflected in emerging markets, where tech stocks, particularly Taiwan Semiconductor Manufacturing Company (TSMC), have become increasingly dominant in indices. For instance, TSMC now makes up more than 10% of the MSCI Emerging Markets Index, and more than 20% of the MSCI Emerging Markets ex-China index. This concentration in tech stocks, as noted by Morningstar, has made emerging market indices more top-heavy, with countries like Brazil, India, Taiwan, and South Korea seeing their indices dominated by mega-cap stocks, especially in the tech sector.
This concentration could undermine the effectiveness of emerging markets as a diversifier in global portfolios, as many of the same narratives, particularly around AI, are driving both U.S. tech stocks and key emerging market tech giants like TSMC, Tencent, and Samsung. As a result, stock picking in such concentrated markets becomes more challenging, often forcing investors to either follow the index or take significant risks with individual stock selections.
However, this concentration also brings some potential upsides. Emerging market tech giants, such as TSMC and Samsung, benefit from significant revenue streams from the U.S., which could provide an affordable way for investors to gain exposure to U.S. growth. Despite their volatility, emerging markets remain an attractive option for growth at a reasonable price, despite the risks posed by their concentration.
Conclusion
Gold’s resurgence signals a complex market landscape, where traditional factors like interest rates and currency movements are being influenced by geopolitical and economic shifts. Meanwhile, the growing concentration in emerging market equities, particularly in tech, presents both challenges and opportunities for investors looking to diversify their portfolios. As market dynamics evolve, the ongoing analysis of these trends will be crucial for understanding their broader implications.
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