Global risk aversion ran high this week, yet traditional safe-haven assets diverged sharply: US Treasuries drew strong demand, the yen rose to a key technical level, while gold unexpectedly declined.
Gold fell below $4,000 per troy ounce on Friday, touching a more than three-month low of $3,986.50, bringing its weekly loss to 4%.
Analysts at Berenberg noted that gold's decline "against a risk-off backdrop" represents a "noteworthy divergence."
Meanwhile, French fiscal concerns pushed the yen to a one-year high against the euro, while the dollar fell below the key support level of 157.50 against the yen to around 156.9. Goldman Sachs FICC named the yen its top hedging tool in the current environment.
The US 10-year Treasury yield fell back below 5% on Thursday for the first time in a month, making it the most favored safe-haven destination this week.
The concentrated release of risk sentiment this week stemmed from multiple overlapping pressures: French budget deficits triggering European sovereign debt concerns, suddenly rising doubts over whether AI capital expenditure can continue to secure financing support, and persistent geopolitical tensions in the Middle East.
Gold Loses Its Safe-Haven Crown, Diverging from Historical Patterns
Gold's performance this week stood in clear contrast to its traditional safe-haven attributes. Typically, falling US Treasury yields benefit gold, which offers no yield, but investors poured into Treasuries this week while continuing to sell gold.
Berenberg analysts said the last time gold performed so weakly amid a sharp decline in bond yields was December 2008, the deepest phase of the global financial crisis.
The analysts believe gold's current weakness is closely tied to its role as a speculative asset over the past year. That speculative frenzy pushed gold prices to a record high above $5,400 in January, but as those traders gradually exited, prices have since fallen by more than one-fifth.
CME Group Chief Economist Erik Norland said the biggest driver of this year's precious metals decline is the shift in market expectations from rate cuts to rate hikes.
However, he also noted that given fiscal deficits eroding bond market confidence, rising inflation, geopolitical risks, and continued central bank gold purchases, gold prices remain far above early 2025 levels, which is "surprising."
World Gold Council data shows central bank gold purchases rose in September to the highest monthly level since November 2024. John Reade, senior market strategist at the World Gold Council, said at the council's precious metals summit that high interest rates have reduced gold's investment appeal, while high energy prices have weakened consumers' ability to buy gold. John Reade said:
"This year, in the absence of safe-haven buying, fundamental factors carry more weight."
At the World Gold Council summit, several fund managers remained cautiously optimistic about gold's outlook, expecting a price rebound, but current technical and capital flow pressures make this expectation face greater uncertainty.
Berenberg analysts warned that Friday's close below the $4,000 threshold "could trigger further outflows from gold ETFs and technical selling across the gold equity sector."
Gold ETF demand already declined in the first half of this year, rebounded in the third quarter as September sales recovered, but current price action poses new pressure on related capital flows.
Yen Becomes the Week's Most Sought-After Safe-Haven Asset
As gold lost its footing, the yen became the biggest beneficiary of safe-haven trading this week.
Amid escalating French debt concerns, the yen rose to a one-year high of 175.20 against the euro, while the dollar fell to a five-week low of 156.08 against the yen.
Goldman Sachs FICC analyst Chryssafis named the yen as the preferred hedging tool in a scenario of an AI bubble bursting, with the dollar having broken below the 157.50 multiple-bottom support and the 50-day moving average against the yen.
Goldman Sachs believes that declining attractiveness of US dollar assets and capital repatriation to Japan will drive yen appreciation. Goldman's long-term fair value model shows the yen is undervalued by about 40% against the dollar, making it the most undervalued among the currencies it tracks.
Japanese government data shows consumer prices excluding fresh food rose 2.1% year-on-year in September, accelerating from 1.7% in August, but inflation remains moderate compared to the US and Europe, which also enhances the yen's appeal relative to other major currencies.
Mizuho Bank market economist Kyugo Hasegawa noted in a research report that France's fiscal problems boosted the Swiss franc while raising market vigilance that the Swiss National Bank might act to limit franc appreciation, which could channel some safe-haven flows toward the yen.
But he also emphasized that whether the yen can rise further ultimately depends on the direction of Japan's domestic fiscal and monetary policy.
Also worth noting is Sprott Physical Gold & Silver Trust (CEF), which holds physical gold and silver and may see NAV fluctuations as bullion prices decline.
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