Gold rallied amid December's market pullback and January's rebound, but has lost ground over the past week. (Keystone)

Gold prices behaved as expected during the December sell-off on equity markets, rising 5% as nervous investors flocked to safe havens. Even as global equities rebounded in January (the MSCI World was up 7.2%) and investors' risk appetite returned, the yellow metal continued to gain ground, rising a further 3%.

CIO regarded the extent of the rally as overdone, and believed it was partly attributable to speculators' extreme positioning at the time the market pullback took hold in late 2018. "Traders rushed to cover record net-short positions, which likely flipped to a sizable net long," explain CIO analysts Wayne Gordon and Giovanni Staunovo. "Likewise, they added gold ETFs to their holdings, reaching a 2013 high, as the sharp sell-off in US equity markets and policy uncertainties brought safe-haven demand back to the fore."

However, with safe-haven demand now easing - and the US dollar showing renewed strength - the gold rally has lost momentum over the past week. Spot prices fell to USD 1,306 per ounce on Thursday from a year-to-date high of USD 1,326 per ounce on January 31. Absent another risk-off event, CIO expects the yellow metal to trade broadly sideways in the near term. "We remain positive on the US economy, financial conditions again eased in January and consumers are still confident," say Gordon and Staunovo.

January also brought a shift in the US Federal Reserve's (Fed) policy stance to neutral, after the latest FOMC statement dropped any bias toward hiking rates. "This means real US interest rates have likely peaked, though earlier than we expected," Gordon and Staunovo note. "In March, Fed officials will likely tweak their view on the policy path – but markets expect this."

As the business cycle enters its later stages, CIO likes gold's insurance qualities and its ability to reduce volatility in a portfolio. It retains a bullish stance on gold on a 12-month horizon, with a price forecast of USD 1,350 per ounce.

For more information, please see the CIO report, "Precious Metals: Gold's rally disproportionate".