Middle East peace talks benefit gold, but Fed hawkish stance limits ETF demand

Overview

This report summarizes the views of Morgan Stanley's European commodities strategy team following a meeting. The key conclusion is that despite Middle East peace talks reducing oil-induced inflation pressure and central bank gold purchases providing structural support, the Fed's recent hawkish stance has increased the opportunity cost of holding gold, leading to ETF outflows. While the report remains bullish on gold, achieving the $5200 per ounce target in the second half of 2026 is more challenging, depending on ETF demand resuming.

Core views

Demand-side structural divergence: Strong central bank purchases, but weak ETF demand. The World Gold Council (WGC) survey shows that 45% of surveyed central banks plan to increase gold reserves in the next 12 months, a record high. China's central bank accelerated gold purchases by 23 tons in March to May, higher than the previous 12 months' 19 tons. However, ETF flows are more sensitive to interest rate expectations and have recently been net negative due to the Fed's hawkish stance. Macroeconomic dual influence: Middle East peace talks and Fed policy. Middle East conflict de-escalation is seen as a positive for gold as lower oil prices help reduce import countries' inflation and external balance pressures, reducing the need for central banks to sell gold or tighten monetary policy. In contrast, the Fed is interpreted as more hawkish, raising rate hike expectations and real yields, increasing the opportunity cost of holding the non-interest-bearing asset gold, thus suppressing ETF purchases. Historical patterns and current differences: The report reviews history and finds that gold's performance after Fed rate hikes varies, averaging a 0.84% increase in the month following a 25 basis point hike. This typically occurs when hikes are seen as 'dovish' (e.g., 2017), policy mistakes (e.g., 2018), or with a weakening dollar. However, in the current environment, without ETFs returning, central bank purchases alone may not be enough to drive gold prices significantly higher.

Analysis framework

The report uses a combination of supply and demand framework with macro factor analysis. First, gold demand is broken down into official sector (central banks) and investment sector (ETFs), assessing their respective drivers: central bank purchases are driven by geopolitical and de-dollarization factors, while ETF flows are highly sensitive to real interest rates and dollar movements. Second, through macro event analysis, the impact of Middle East peace talks on oil prices, inflation, and international balances is evaluated, and its indirect support for gold demand is derived. Finally, the Fed's monetary policy path (hawkish/dovish) and its impact on real yields are considered to judge the near-term resistance level for gold prices.

Methodology notes

• Industry/ Sector Analysis FrameworkSupply and Demand Framework

  Breaking down gold demand into official sector (central banks) and investment sector (ETFs) for separate analysis

  The report does not broadly look at total demand but distinguishes between 'interest rate insensitive' central bank purchases and 'highly interest rate sensitive' ETF flows, helping readers understand why gold prices remain constrained despite central bank buying.

• Macroeconomic framework

  Opportunity cost analysis (real interest rates and gold pricing)

  The report emphasizes that the Fed's hawkish stance increases the 'opportunity cost' of holding gold, as because gold does not bear interest, when bond yields rise, investors prefer holding bonds over gold, which is the core logic of short-term gold price movements.

Key data

• 2026 second half gold price target$5,200 per ounceThe report believes achieving this target is more challenging and depends on ETFs returning.
• Percentage of central banks planning to increase gold reserves45%WGC survey shows 45% of surveyed central banks plan to increase gold reserves in the next 12 months.
• China's gold purchases23 tonsChina's central bank purchased 23 tons of gold in March to May, higher than the previous 12 months' 19 tons.
• Average gold price increase after a Fed 25 basis point hike+0.84%Historically, after a Fed 25 basis point hike, gold averages a 0.84% increase in the following month.

Impact & implications

For gold investors, the market is currently in a tug-of-war between structural support (central banks) and cyclical pressures (Fed/ETFs). The report suggests that if Middle East peace talks continue and low oil prices effectively reduce inflation expectations, the Fed may pivot, reducing ETF selling pressure. Conversely, if the Fed remains hawkish longer, ETF flows may continue to be negative, limiting gold's upside potential.

Risks

• The Fed's policy is more hawkish than expected, leading to higher real yields
• Middle East tensions rise again, pushing up oil prices and prompting some countries to sell gold to balance their budgets
• ETFs do not return as expected, leaving gold without the necessary buying power

What to watch

• Trends in ETF gold holdings
• Subsequent Fed monetary policy statements and their implications for labor market risks
• Oil price movements and their impact on global inflation expectations
• Data on gold reserve changes by major central banks, particularly China