The final week of January delivered a stark reminder that even the most powerful trends can reverse abruptly when the right catalyst emerges. Gold's precipitous 10% fall and silver's eye-watering 30% decline, dominated headlines, yet the month overall proved constructive for diversified portfolios.

The Warsh Effect

The proximate cause of precious metals' sudden retreat was President Trump's nomination of Kevin Warsh as Federal Reserve Chair. Markets had been pricing in concerns about Fed independence and potential currency debasement, themes that had propelled gold to new highs throughout January. Warsh, known for his opposition to balance sheet expansion and what he terms central bank "mission creep," represents a more orthodox approach to monetary policy. His nomination effectively took the debasement trade off the table, at least temporarily.

Notably, bond yields barely flinched during gold's sell-off, suggesting the move reflected speculative unwinding rather than a fundamental reassessment of inflation expectations. The US dollar, while recovering modestly, remains well below recent highs, indicating broader concerns about fiscal sustainability haven't entirely dissipated.

January's Broader Picture

Stepping back from the week's drama, January delivered reasonable returns for diversified investors. Emerging markets led the charge, gaining approximately 10%, though this masks significant dispersion, Korean and Taiwanese semiconductor stocks have delivered the lion’s share of gains recently. The Australian market added around 1%, while global small caps outperformed with gains near 5%.

A typical 70/30 portfolio finished January up approximately 1%, with more defensive allocations capturing perhaps half that. Given the geopolitical crosscurrents and policy uncertainty, these are respectable outcomes.

Central Banks in Focus

The Federal Reserve held rates steady, with Chair Powell delivering a hawkish assessment of economic conditions. The US economy continues to demonstrate resilience, the Chicago PMI surprised dramatically to the upside, while inflation remains stubbornly above target. Market pricing for Fed cuts has compressed significantly, with only modest easing expected through mid-year.

Closer to home, Australian Q4 CPI printed at 0.9% quarter-on-quarter for trimmed mean inflation, 15 basis points above RBA forecasts. Combined with elevated capacity utilisation and robust employment data, this has cemented expectations for a rate hike at tomorrow's meeting. The Australian dollar's strength, briefly touching 70 US cents for the first time since early 2023, reflects both US dollar weakness and the interest rate differential story.

Earnings Season: A Tale of Two Tech Giants

The US reporting season provided mixed signals for technology investors. Microsoft, despite beating revenue expectations, saw its shares hammered nearly 12% on concerns about AI investment returns. Meta, by contrast, rallied over 9% after demonstrating clearer monetisation of its AI spending. The divergence underscores market sensitivity to valuations and the growing expectation that AI investment must translate to earnings growth.  Bellwether stocks Boeing and GM also reported good results and aligned with economic data for the 4th quarter in the US  that has been fairly strong. A third of US companies have now reported and with 80% so far beating expiations year on year earnings growth of close to 10% looks probable. 

Looking Ahead

With the RBA decision imminent, Iran tensions simmering, and China's PMIs signalling continued weakness, February begins with no shortage of crosscurrents. For diversified portfolios, January's message remains clear: breadth and discipline continue to serve investors well when individual asset classes can move so dramatically on a single headline.