Gold’s safe-haven appeal under scrutiny as Iran conflict fails to lift prices: Morgan Stanley

Gold prices have declined since the onset of the conflict in Iran, challenging the metal’s long-held reputation as a reliable hedge during geopolitical turmoil. Despite a strong multi-year rally, the latest downturn suggests that macroeconomic forces—particularly interest rate expectations—are currently outweighing traditional safe-haven demand, according to a report by Morgan Stanley.

Gold underperforms across asset classes

In the first month of the conflict, gold fell 14.5 per cent, significantly underperforming global equities and bonds. Over the same period, FTSE All-World Index declined 9 per cent, the S&P 500 fell 7.8 per cent, and the US Treasury Total Return Index dropped 3.6 per cent.

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The divergence marks a shift from previous geopolitical crises, when gold typically outperformed risk assets and served as a defensive hedge. Instead, recent price movements show gold tracking closer to sovereign bonds, highlighting its growing sensitivity to real yields rather than geopolitical shocks.

Monetary policy now the key driver

Morgan Stanley notes that rising expectations of higher real interest rates have become the dominant force shaping gold prices. Supply disruptions linked to the conflict have pushed oil prices higher, reducing expectations for near-term US Federal Reserve rate cuts and weighing on gold.

“With the conflict triggering an energy supply shock that has reduced hopes for lower U.S. interest rates, it is not surprising that gold has struggled to work as a safe haven this time,” said Amy Gower, Metals & Mining Commodity Strategist at Morgan Stanley Research.

Gower added that gold’s sensitivity to monetary policy has now overtaken its traditional safe-haven role, with investors increasingly focusing on the expected policy response rather than the geopolitical event itself.

Central banks and ETFs reduce demand

According to the Morgan Stanley report, additional pressure came from weaker institutional demand. After strong buying since 2022, central banks paused purchases in March. Turkey reportedly sold gold and arranged swaps, while India delayed bullion import approvals.

Exchange-traded funds (ETFs) also turned net sellers, liquidating a significant portion of earlier inflows. However, early signs of stabilisation have emerged, with partial repurchases recorded in April.

Gold Outlook: Policy expectations hold the key

Despite near-term weakness, Morgan Stanley Research has an optimistic medium-term view. Gold price forecast sees the yellow metal reaching up to $5,200 per ounce in the second half this year, as driven by renewed central bank demand, ETF purchases, and expectations of future cuts in US Federal Reserve rates.

Future price growth will be contingent upon monetary policy loosening in 2027, while downside risks exist amid persistently high inflation caused by ongoing geopolitical instability. However, the other potential risk factor lies in reduced investor and central bank demand amid current relatively high gold prices.

The report concludes that gold’s performance is increasingly being driven not by geopolitical uncertainty, but by shifting expectations around global interest rates and monetary policy.