Gold prices have declined despite rising geopolitical tensions in the Middle East, a counterintuitive move analysts at Morgan Stanley attribute mainly to currency dynamics and short-term liquidity needs.
In a note from strategists led by Amy Gower, the bank acknowledged that "Uncertainty typically supports safe havens, implying upside for gold," but added that recent market action has been "more mixed with USD strength." The team framed the dollar's appreciation as a material headwind for precious metals, even as geopolitical risk would normally boost demand for bullion.
Several factors are interacting to shape gold's recent trajectory. The strategists highlighted expectations around potential Federal Reserve interest-rate cuts, currency movements, ongoing geopolitical risk, and prevailing market liquidity conditions as the central elements influencing prices.
One mechanism the note emphasizes is the role of liquidity during market stress. Morgan Stanley suggested that some of the recent selling of gold may reflect investors raising cash to meet margin calls or rebalance portfolios, rather than a fundamental shift away from gold as a safe-haven asset. As the strategists put it: "We think gold’s underperformance is likely to be temporary if the current situation continues, with recent selling most likely due to the need for liquidity."
Looking ahead, the bank said that if geopolitical tensions remain elevated, they would expect gold to reverse some of its underperformance and "catch up - $5700/oz" in the second half of the year.
The note also underlines the influence of the U.S. dollar on commodity price movements. A stronger dollar makes dollar-priced metals more expensive for buyers using other currencies and tends to weigh on metal prices, while dollar weakness generally supports commodity markets. Morgan Stanley's foreign-exchange strategists flagged the prospect of near-term volatility in the dollar, with risks in both directions tied to global macroeconomic developments and dynamics in energy markets.
Regional oil revenues were cited as another channel that could bolster demand for gold. Higher energy prices can strengthen government finances across oil-producing countries, potentially enabling larger central-bank gold purchases. The strategists noted that Middle Eastern central banks acquired roughly 90 tonnes of gold in 2022, which was part of about 400 tonnes of global net purchases that year.
Trade flows were also highlighted as a relevant factor. The bank pointed to Dubai's significant role in global bullion trade, observing that about 20% of global gold flows pass through the emirate, making it the second-largest exporter after Switzerland. Such trade patterns can affect availability and pricing in global markets.
Context and implications
Taken together, Morgan Stanley's analysis frames the recent weakness in gold as a function of transitory market mechanics and currency dynamics rather than a durable loss of safe-haven demand. The strategists present a conditional outlook in which continued geopolitical tension could see gold regain ground later in the year, while near-term dollar volatility and liquidity pressures remain key uncertainties.