As markets sway, safe havens shine. Except gold

The AI-fueled turbulence hitting markets in recent weeks ​has revived demand for many traditional safe-haven assets, with one glaring exception: gold.

Growing ‌concerns about the stability and profitability of the AI boom have knocked the S&P 500 and Nasdaq from record highs, pushing investors to seek protection in classic havens like U.S. Treasuries, the dollar , the Swiss franc, and the Japanese yen. But gold, the oldest safety play of all, has not ⁠found a ​bid.

The yellow metal slid below US$4,000 an ounce on Friday, its lowest level in a year, despite a seemingly favorable “risk off” backdrop of falling stock prices, widening credit spreads, lower bond yields and diminishing expectations for U.S. interest-rate hikes.

Even persistent weakness in bitcoin, once termed “digital gold,” and last week’s US$6.3-billion cyberattack at crypto exchange Binance, potentially the world’s biggest financial heist, have failed to offer gold any discernible support.

Nor has ​the eight-month U.S.-Iran war. In fact, it has been a long time since gold ‌displayed the safe-haven and inflation-hedge characteristics traditionally associated with it.

Central banks, among the world’s most safety-conscious, conservative and price-insensitive investors, have ramped up gold purchases in recent years. That may reflect a desire to diversify away from the dollar amid volatile US policy decisions more than a firm belief in gold’s safety appeal.

Figures from the World Gold Council on Tuesday show that central-bank purchases rose 42 per cent in the third quarter to 321 metric tons, the highest quarterly total ‌since the fourth quarter ​of 2024. Poland and China led ‌officially reported buying.

But an International Monetary Fund paper in July found that bullion is not a “reliable” hedge against equity market volatility and perhaps never ​has been, despite the long-held belief otherwise, and that its safe-haven properties “are neither universal nor ⁠unconditional.”

Not only is gold not functioning as a store of value, it often trades like a speculative asset. ⁠When gold hit a dizzying peak of US$5,595 an ounce last January, one-week “realized” volatility shot up to 90 per cent. That’s meme-stock territory.

Right now, gold’s correlation with equities is positive and strengthening. Suki ​Cooper and Steven Englander at Standard Chartered estimate that gold’s positive correlation with the S&P 500 on a three-month rolling basis is up to 0.48, and on a one-month basis, to 0.69.

Gold has certainly had a wild two years. Having surged 65 per cent last year, its best annual performance since the 1970s, some degree of rebalancing this year was always on the cards.

Gold has lost around a quarter of its value since the U.S. and Israel first ⁠attacked Iran on February 28, as spiking energy prices and expectations of tighter monetary policy have diminished the allure of the non-yielding metal.

Bullion is now down 9 per cent so far this year, making it the worst performer by year-to-date dollar returns in Bank of America’s list of 14 major asset classes. That’s notably worse than even government bonds, which only weeks ago offered the highest yields in a quarter of a century.

Is it time for a bounce? If you believe in mean reversion, then yes. Gold is the most oversold asset class in ⁠BofA’s ranking, trading some 10 per cent below its 200-day moving average in dollar terms. That’s around ​five times more oversold than government bonds, by this metric, and it puts gold in the ballpark of markets like Chinese and Brazilian equities ⁠that have grabbed headlines recently for all the wrong reasons.

But what would spark a rebound? Probably not further stock market turbulence. If equity-market losses trigger liquidity needs, investors are more likely to ‌sell gold than buy.

“In the short term, gold’s role as a liquidity provider and the need to generate cash are likely to overshadow ​its role as a safe-haven asset,” Englander and Cooper wrote on Friday.

That’s probably true. Perhaps it’s also time to ask whether gold may no longer be a reliable port in the storm.