Recent market turbulence fueled by AI-driven volatility has sparked a surge in demand for traditional safe-haven assets. Investors are flocking to U.S. Treasuries, the dollar, the Swiss franc, and the Japanese yen as concerns grow about the stability of the AI boom. However, gold, typically seen as the ultimate safe-haven asset, has notably underperformed. On Friday, gold prices dropped below US$4,000 an ounce, marking the lowest level in a year, despite a broader risk-off environment.
The decline in gold prices is particularly striking given the backdrop of falling stock prices, widening credit spreads, and lower bond yields. Even the persistent weakness in bitcoin and the recent US$6.3-billion cyberattack on crypto exchange Binance have failed to provide any support to gold. The ongoing eight-month U.S.-Iran war has also not triggered the usual safe-haven demand for gold, raising questions about its traditional role as a hedge against uncertainty.
Central banks have been significant buyers of gold in recent years, with purchases rising 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 the officially reported buying. However, an International Monetary Fund paper in July suggested that gold is not a reliable hedge against equity market volatility, challenging the long-held belief in its safe-haven properties. Instead, gold often trades like a speculative asset, with one-week realized volatility reaching 90 per cent when it hit a peak of US$5,595 an ounce last January.
Gold's correlation with equities has turned positive and is strengthening. Suki Cooper and Steven Englander at Standard Chartered estimate that gold's correlation with the S&P 500 is up to 0.48 on a three-month rolling basis and 0.69 on a one-month basis. After a 65 per cent surge last year, gold has lost around a quarter of its value since the U.S. and Israel first attacked Iran on February 28. It is now down 9 per cent year-to-date, making it the worst performer among 14 major asset classes tracked by Bank of America. Despite being the most oversold asset class, a rebound may not be triggered by further stock market turbulence, as investors are more likely to sell gold to meet liquidity needs.