Gold, traditionally viewed as a reliable hedge against market volatility, is currently behaving more like a "high-beta asset" that amplifies market selloffs rather than providing protection, according to economist Robin Brooks of the Brookings Institution. Brooks, a former chief economist at the Institute of International Finance (IIF) and chief FX strategist at Goldman Sachs, noted that gold has failed to act as a safe-haven asset over the past six weeks since the outbreak of conflict involving Iran.
"Gold is down ten percent, which is far more than the S&P 500, which is down less than one percent. You're not much of a risk hedge if you sell off harder than the S&P 500 in a bad shock. You're the opposite," Brooks stated in a Kitco.com report. He described gold's current behavior as that of a high-beta asset that intensifies market downturns.
Brooks examined several theories to explain this shift. The first suggested that emerging market central banks had sold gold holdings during recent shocks, but he noted this was primarily true only for Turkey, where holdings fell by 128 tons to mobilize foreign exchange reserves to defend the Lira. "Turkey is an outlier in this regard. Its insistence on pegging to the Dollar forces its central bank to sell reserves in bad shocks, a practice most other EMs ditched long ago and for good reason," he explained.
The second factor, according to Brooks, is that the massive rally in gold over the past year—what he called the 'debasement trade'—attracted many new buyers who proved to be more nervous and likely to abandon positions during negative events. He suggested this explains why gold has been trading like a high-beta asset recently. Brooks concluded that if this analysis is correct, it's just a matter of time until the 'debasement' crowd is eliminated and gold returns to its traditional safe-haven role. He emphasized that gold's safe-haven status isn't gone forever but is "contaminated at the moment."
Meanwhile, gold prices experienced volatility driven by multiple factors. On Tuesday, a weaker U.S. dollar and reduced inflation concerns—stemming from a drop in oil prices amid hopes for continued U.S.-Iran peace discussions—contributed to a price rise. Oil prices dropped below $100 per barrel amid hints of possible negotiations to resolve the conflict, alleviating worries about supply disruptions from the U.S. embargo on Iranian ports.
Hopes for a diplomatic breakthrough between the U.S. and Iran caused the dollar to fall to its lowest level in over a month, making dollar-priced gold more accessible to buyers holding other currencies. This optimism followed a Reuters report suggesting U.S. and Iranian negotiating teams might return to Islamabad this week. At the time of writing, gold prices on COMEX were back above $4,800 per ounce, hitting a session high of $4,819.75 on Tuesday.
However, on Wednesday, gold eased from a one-month high as a firmer dollar and tentative hopes for renewed U.S.-Iran talks encouraged investors to rotate back into riskier assets. Spot gold slipped 0.3% to $4,828.07 an ounce after earlier touching $4,879.52, its highest level since mid-March. U.S. gold futures for June delivery were little changed at $4,851.30.
Analysts noted that gold remains highly sensitive to Middle East headlines. "Gold prices are reacting to the Middle East headlines in the short term with hopes that the two countries will engage in talks," said Marex analyst Edward Meir. The interest-rate backdrop also shapes gold's movement, with traders seeing a higher chance of a U.S. rate cut this year than last week, though expectations remain fluid.
Carsten Fritsch, commodity analyst at Commerzbank AG, noted: "The downside potential for prices is limited by the fact that virtually no further Fed rate cut is priced in until the end of the year. As long as the market does not begin to seriously consider a rate hike by the US Federal Reserve – there are no signs of this so far – the gold price is unlikely to fall much further."
Silver showed stronger performance, rising 2.8% to $77.768 an ounce on Tuesday and gaining 0.8% to $80.15 on Wednesday. For now, gold remains caught between competing forces: lower oil prices and diplomatic hopes drawing money back into equities, while persistent uncertainty around the Fed, the dollar, and the Middle East continues to provide an underlying floor.
