Morgan Stanley explains why gold fell despite the escalation of tensions in Iran

Investing.com - Despite escalating geopolitical tensions in the Middle East, gold prices have shown an unexpected weakness. Analysts say this trend is mainly driven by currency dynamics and liquidity needs.

The recent strength of the US dollar has become a major obstacle for the precious metals market, even though geopolitical uncertainties usually support gold demand.

A team led by Morgan Stanley strategist Amy Gower wrote in a report: “Uncertainty usually supports safe-haven assets, which means gold should rise,” but added that recent price movements are “more complicated due to the dollar’s strength.”

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Currently, multiple forces are influencing gold prices simultaneously. These include expectations of Fed rate cuts, currency trends, geopolitical risks, and market liquidity conditions.

According to these strategists, recent gold sell-offs may reflect investors’ need to raise cash during market stress, rather than a fundamental change in sentiment.

The strategists stated: “We believe that if the current situation persists, poor performance in gold may be temporary, and the recent sell-off is most likely due to liquidity needs.”

If geopolitical tensions remain high, strategists say they “expect gold to catch up — reaching $5,700 per ounce in the second half of this year.”

The team also emphasized the role of the dollar in shaping commodity prices. A stronger dollar often suppresses metal prices by increasing costs for non-U.S. buyers, while a weaker dollar typically supports commodity markets.

The bank’s forex strategists expect currency markets to be volatile in the near term, with the direction depending on global macroeconomic and energy market dynamics, presenting risks on both sides.

Meanwhile, oil-related income streams in the Middle East could support gold demand. Rising energy prices may strengthen regional government finances and potentially increase central bank gold purchases.

The strategists pointed out that Middle Eastern central banks bought about 90 tons of gold in 2022, accounting for part of the approximately 400 tons of net global purchases that year.

Trade flows remain an important factor. The bank noted that Dubai handles a significant share of global gold trade, with about 20% of worldwide gold flows passing through the emirate, making it the second-largest gold exporter after Switzerland.

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