The beloved's sins are beautified by beauty; gossip about misconduct is transformed into praise by the beloved's lovely name.
Sonnet 95 presents beauty as a magical substance that transforms vices into virtues. The beloved's beauty is so powerful that gossip about lust becomes, when attached to the beloved's name, a form of praise. The veil of beauty covers all blots. This is an extraordinary inversion: beauty doesn't hide sin so much as redeem it, transmogrifying scandal into legend. The beloved becomes a kind of alchemical stone that turns base accusation into golden admiration.
Yet the couplet warns that this privilege is conditional and fragile. The 'hardest knife' loses its edge through misuse—a metaphor for the beloved's power to seduce and destroy if wielded. The warning suggests the beloved has been using this power, testing its limits. The beloved's privilege is vast but not infinite; there's an implied threat that continued abuse will erode the transformative power of beauty itself. Charm is only a weapon if handled carefully.
Your gorgeous friend gets away with terrible behavior because people repeat the scandals about them with fascination rather than disgust. A story that would destroy a regular person becomes a legend when it's about someone beautiful. You watch them rely on this magic until it breaks.