Gold's safe-haven status is being put to the test. While concerns over debt and inflation continue to provide long-term support for bullion, in a market environment where equities are falling and bond yields are rising, gold can also be sold off as investors scramble to raise cash, making it hard for the metal to serve as a short-term refuge.
On October 23, spot gold briefly dropped below the $4,000 per ounce mark. Earlier this year, gold had broken through $5,000 per ounce, hitting a record high, but the rally has since slowed, prices have pulled back, and market volatility has intensified.
Strategists at HSBC Asset Management noted in a recent report that high oil prices, rising interest rates and surging bond yields are weighing on gold. Still, factors such as a fragmented geopolitical landscape and central bank reserve diversification continue to support gold demand, and its long-term allocation value has not disappeared.
Gold's recent move in tandem with US equities comes down to market liquidity pressure, not the complete disappearance of safe-haven demand. HSBC warned that leveraged funds are concentrated in gold, and once a stock market decline triggers margin calls, investors may be forced to sell gold to raise cash, putting pressure on both gold and equities at the same time. The bank stressed that no single asset can withstand all types of market shocks, and investors should not view gold as a universal hedge.
Why gold fell alongside US stocks: liquidity pressure weakens its short-term safe-haven role
HSBC Asset Management strategists believe the recent pullback in gold prices does not mean the logic behind the so-called "Debasement Trade" has failed. At its core, this trade reflects investors moving some funds into physical assets such as gold on concerns about government debt expansion, declining purchasing power of currencies and inflation risks.
"As long as debt and inflation concerns persist, this trade can continue," the strategists said.
But a valid long-term allocation rationale does not mean gold can rise during every market turmoil. When a stock market decline creates margin pressure, investors holding leveraged positions may need to sell liquid assets to replenish cash, and gold becomes an asset that gets sold. At such times, gold may not hedge against equity drawdowns and could even fall in tandem with stocks.
HSBC Global Chief Investment Officer Willem Sels and Global Head of Wealth Insights Lucia Ku also noted in a July report that gold failed to rise notably during the Middle East conflict, with its trajectory broadly in line with equities. The two argued that US Treasury yields are a key factor affecting gold prices: because gold itself generates no interest, rising yields increase the opportunity cost of holding it, thereby pressuring prices.
This also explains the limits of gold's safe-haven properties: gold can hedge some long-term currency and credit risks, but it may not protect a portfolio during short-term liquidity shocks. When investors broadly need cash, an asset's liquidity can instead make it a priority for liquidation.
Short-term pressure does not change the medium-term allocation logic, but gold is no cure-all
HSBC expects that elevated real yields and a stronger dollar may keep gold prices range-bound in the short term, but portfolio diversification needs, continued central bank purchases and ETF inflows will still provide support. "We expect gold prices to move higher further by the end of the year," Sels and Ku said.
As for the reasons behind the earlier sharp correction in gold, James Steel, HSBC's chief precious metals analyst, noted in May that gold prices retreated after hitting a high of about $5,400 per ounce in late January this year, partly because bullish positioning in the market had become overly crowded and profit-taking exacerbated price volatility.
Steel argued that gold's poor performance during the Middle East conflict does not mean its safe-haven function has failed. When oil prices rise, bond yields and the dollar strengthen, and stocks fall, investors may sell gold to raise cash. "Gold is an insurance policy, and that insurance policy is being cashed in."
Comments