Conventional wisdom suggests that gold is the ultimate safe-haven asset during geopolitical conflicts. However, as Middle East tensions intensified recently, this traditional safe-haven unexpectedly weakened. Late Tuesday Beijing time, international precious metals markets experienced a sharp plunge: spot gold fell over 6%, breaking below the $5,000 per ounce threshold, while spot silver dropped more than 10%. Although prices recovered somewhat on Wednesday and Thursday, they remained below Monday's peak levels.
A team led by Morgan Stanley strategist Amy Gower published a report providing detailed explanations for this unusual market behavior. According to Morgan Stanley analysts, gold's recent atypical performance is primarily driven by currency dynamics and liquidity requirements. While geopolitical uncertainty typically supports gold demand, recent U.S. dollar strength has emerged as a significant headwind for precious metals.
The strategists identified multiple forces simultaneously influencing gold prices, including expectations for Federal Reserve interest rate cuts, currency movements, geopolitical risks, and market liquidity conditions. The recent gold selloff likely reflects investors raising cash during market stress rather than signaling a fundamental shift in investment sentiment. The team suggested that if current conditions persist, gold's underperformance may be temporary, with recent selling pressure mainly attributable to liquidity needs.
The analysis emphasized the U.S. dollar's crucial role in gold price movements. Typically, dollar strength tends to depress gold prices by increasing costs for non-U.S. buyers, while dollar weakness generally supports commodity markets. Although uncertainty normally boosts safe-haven assets like gold, recent price action has shown a more complex relationship with dollar appreciation.
Morgan Stanley's currency strategists anticipate near-term dollar volatility with risks balanced in both directions, depending on global macroeconomic and energy market dynamics. The strategists maintain that if geopolitical tensions continue escalating, gold could catch up during the second half of the year, potentially reaching $5,700 per ounce.
Meanwhile, gold demand might find support from oil-related revenue streams in the Middle East. Rising energy prices could strengthen government finances in the region, potentially prompting central banks to increase gold purchases. The strategists noted that during 2022's oil price surge, several Middle Eastern central banks collectively purchased approximately 90 tons of gold, representing a significant portion of that year's global net purchases of 400 tons.
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