Twisted market relationships from 2025: dead or due for revival?

2025 was a year when several “tried-and-true” economic and financial relationships went topsy-turvy. Markets threw some curveballs that left investors scratching their heads. In Australia, with its commodity-centric economy, these twists were especially noteworthy.

Below, I examine five key relationships that broke down in 2025 and consider whether these anomalies are temporary distortions or signals of deeper, longer-lasting change.

#1 - High inflation, high rates… but no growth crash

Conventional wisdom says high inflation forces central banks to lift interest rates, which in turn slows economic growth. By late 2024, many investors were bracing for that painful sequence. Inflation remained elevated into 2025 and policy rates sat at decade highs. Yet the recession never arrived.

Instead, global growth proved remarkably resilient. A World Bank analysis noted that renewed US–China tariff tensions in early 2025 “have not – at least so far – produced the rapid downturn many feared”, with activity holding up across most major economies.

Australia followed a similar path. Despite aggressive RBA tightening in 2022–23, growth muddled through in 2025. Unemployment stayed low and household spending slowed, but did not collapse. A key reason was policy flexibility. Both the US Federal Reserve and the RBA began easing earlier than expected in 2025, even with inflation still above target. That pivot reduced the drag on activity.

Post-pandemic resilience also played a role. Households and businesses adapted, labour markets remained tight, and investment held up better than expected.

Dead or revival? The idea that higher rates automatically trigger recession clearly needs revisiting. But gravity still applies. If inflation proves stubborn, the old trade-off between price stability and growth may yet reassert itself.

#2 - Gold broke its old rules

Gold is supposed to shine when everything else struggles. It usually benefits from economic stress, a weaker US dollar, or falling real yields. In 2025, it ignored the rulebook.

Gold surged to record highs, with the Bloomberg Gold Index up nearly 60% for the year, its strongest performance since the late 1970s. This occurred alongside rising equity markets and only modest US dollar weakness.

The explanation lies in demand. Central banks, particularly in Asia, bought gold at record levels as they sought to diversify reserves away from the US dollar and hedge geopolitical risk. RBC Wealth Management noted that the long-standing inverse relationship between gold and real yields “seems to have broken down”, overwhelmed by structural buying and persistent uncertainty.

For Australian investors, this was a double-edged sword. Australia is a major gold producer, so miners and export revenues benefited. But traditional diversification assumptions failed. Gold and equities rose together, complicating portfolio construction.

Dead or revival? Central bank buying and geopolitical hedging suggest gold may remain less sensitive to rates than in the past. But if real yields rise meaningfully or tensions ease, old relationships could partially return.

#3 - Commodity currencies lost their mojo

Australia’s currency has long been tethered to commodity prices. When iron ore and coal are strong, the Aussie dollar usually follows. In 2025, that link weakened.

Iron ore briefly traded above US$100 a tonne mid-year, yet the AUD fell around 10% against the US dollar and hit its weakest level since the pandemic.

China was a major factor. Sluggish Chinese growth capped demand for bulk commodities and weighed on Australia’s export outlook. Rising supply also limited price upside. At the same time, Australia’s interest rates fell relative to the US as the RBA cut earlier, eroding the AUD’s yield appeal.

The result was a currency that struggled despite relatively resilient commodity prices.

For investors, the weaker AUD was a mixed blessing. It boosted returns on offshore assets and helped exporters, but also imported inflation and squeezed purchasing power.

Dead or revival? If China stabilises or the US dollar weakens as Fed cuts accelerate, the AUD could reconnect with commodities. The 2025 divergence looks situational, not structural, but expectations of a tight correlation should be tempered.

#4 - The yield curve that cried wolf

Few indicators have a scarier reputation than the inverted US yield curve. Historically, when short-term rates exceed long-term rates, recession follows. Coming into 2025, the US yield curve had been inverted longer than at any time in modern history.

Yet the recession never came. Instead, the curve steepened again as central banks eased policy while growth remained intact.

Why did the signal fail? Early rate cuts removed pressure before demand collapsed. Households still had buffers, labour markets stayed tight, and investment – particularly in AI and infrastructure – held up. Some economists also argue that the neutral rate may now be higher, reducing the curve’s reliability.

For Australians, the lesson was clear. When the US avoids recession, Australia often does too.

Dead or revival? The yield curve is not dead, but it may be less precise in a post-pandemic world. Investors should treat it as a warning light, not a countdown timer.

#5 - House prices vs rate hikes: bending, not breaking

Perhaps the most confronting breakdown for Australians came from housing. Logic suggested that sharply higher mortgage rates would crush prices. Instead, by 2025, prices were rising again across Sydney, Brisbane and Perth.

The driver was demand. Immigration surged as borders reopened, while housing supply remained constrained. Thousands of new residents chased too few homes. At the same time, the RBA paused and then modestly eased policy, providing some relief to borrowers.

The result was a market that bent, but did not break.

For investors, resilient housing supported banks and consumer confidence, but also left household debt elevated and affordability stretched.

Dead or revival? Higher rates still matter. But 2025 showed that population growth and supply shortages can overwhelm monetary tightening, at least temporarily.

What lies ahead?

2025 delivered a rare cocktail of twisted market relationships. Inflation did not kill growth. Gold ignored rates. The Aussie dollar lost touch with commodities. The yield curve misfired. Housing defied gravity.

Some of these distortions may unwind. Others may reflect a changing world shaped by geopolitics, demographics and policy flexibility. For Australian investors, the key lesson is simple: question assumptions, stay diversified, and remember that even the most reliable relationships can break down when conditions change.

Markets have a habit of surprising just when confidence is highest.