Gold is again falling sharply, with the stock market. Why it's not behaving the way it used to during a crisis.

By Jules Rimmer

Since the outbreak of the Iranian war, gold has behaved more like any other risk-on asset

After troughing last week, gold had been recovering in line with other risk-on assets until Wednesday's presidential address undermined investor sentiment

Gold's switch from being a safe-haven asset to reflecting the broader market's mood was reinforced on Thursday, as the metal's price dropped sharply.

The Iran war has reversed the traditional relationship of gold to geopolitical turbulence. With the outbreak of hostilities in the Middle East, gold fell around 12% in March. To compound matters, after an inconclusive and at times contradictory address to the nation from President Trump sent markets sprawling Thursday, gold declined along with equities, crypto and other assets considered risk-on.

Having troughed at $4,376 per ounce at the end of March, gold (GC00) had been recovering gradually until Trump's speech Wednesday reversed that trend. In Thursday trading gold fell over 3% to $4,657 per ounce.

There is a combination of factors at work to explain the shift in gold's behavioral characteristics. Chief among them was the huge speculative froth that had developed in the earlier part of the year when gold recorded an intraday peak of $5,626 near the end of January. Immense leverage built up, and a note published by Goldman Sachs' Lina Thomas on Monday identified a rise in call option demand to all-time highs.

The rapid rise in call option demand drove gold prices to overshoot Goldman's forecast.

When the war began then, a significant deleveraging took place. Moreover a significant de-grossing of risk also took place, so traders using long gold positions to hedge shorts in Magnificent Seven stocks MAGS, software IGV or bitcoin (BTCUSD), liquidated their exposure.

Gold has traditionally demonstrated an inverse correlation with interest rates and the dollar DXY. As inflation expectations jumped in March and haven appeal lifted the dollar index back north of 100, this weighed on gold prices, effectively offsetting the typical flight-to-safety qualities investors expect.

There are other more recent motivations behind gold's fall, however. Faced with higher energy import bills, countries like Turkey, for example, found themselves with no option but to sell some gold reserves to shore up its currency. Poland's central bank, one of the largest strategic buyers of gold in the last several years, openly discussed selling gold to fund increased defense spending.

Petrodollar states in the Middle East, struggling to export oil (BRN00) through the hotly-contested Strait of Hormuz and therefore running short of dollars to fund food imports, may also find themselves obliged to relinquish gold reserves to pay bills. Goldman's Thomas is skeptical of these claims but acknowledges they are circulating in the market.

The Goldman Sachs note published Monday reasserted its belief in the inflation-hedging/ safe-haven allure of gold that Thomas thinks will gradually reassert itself. She and co-author Daan Struyven point out that during any twelve-month period in the last fifty years or so when stocks and bonds delivered negative real returns, then gold and commodities delivered positive real returns.

During any 12-month period when both stocks and bonds had negative real returns, either commodities or gold had positive real returns.

The report maintained its year-end 2026 price target of $5,400 for gold, emphasizing that speculative positioning is now low and also that markets are pricing in a more hawkish, interest-rate policy shock than historical precedent suggests. Goldmans, contrary to bond market consensus at present, anticipates two 25 basis point rate cuts (FF00) from the Federal Reserve this year.

Additionally, Goldman Sachs predicts that central bank demand will remain a fundamental pillar of support, averaging about 60 metric tons monthly, once price volatility dissipates. This central bank demand alone, Thomas, calculates, is worth $535 to the gold price.

Goldman Sachs' position is not unique. A report published Thursday by Joni Teves at UBS opines that "the risk that gold extends its bull run for a couple more years is rising. Weaker growth that triggers fiscal and/or monetary stimulus presents upside risks for gold."

While shaving her year-end forecast from $5,200 to $5,000, Teves stays just above the analyst consensus of $4,844.

Also read: Gold's bull run could be nearing its finish line, says UBS strategist

-Jules Rimmer

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04-02-26 0510ET