“There is not a dominant stagflation narrative at this point, but this may emerge if economic data starts to weaken, while the direction of economic data will determine the path for interest rates.” 

The bank forecasts that the gold price will pass US$2000/oz in the third quarter of this year and remain relatively flat, before then falling back in Q4 2024. It is expecting the price to reach $1600/oz by 2026. This runs contrary to other estimations – this week in a research note BMO Capital Markets said that it expected the gold price to be higher than $1600 in 2026 and 2027.

In reality, the gold price has already surpassed $2000/oz, in April and May this year. Spot gold is currently trading at $1910/oz. 

Morgan Stanley said that the current relationship between gold and yields looked closer to the situation in 2011.

“This was time when inflation was also rising and economic growth was deteriorating, leading to stagflation concerns, plus a US debt ceiling crisis. On top, although interest rates were at zero, US 10-year yields were close to current levels,” the bank said. 

That said, the bank said that gold is finding some support this time round, with demand higher from China and a rise in central bank holdings, that has increased since the second half of last year. 

The bank did say however, that it doesn’t expect gold ETF inflows to follow this strength, pointing at weak PMI data out of the eurozone and the US. 

“With equity markets rallying and interest rates rising, a nonyielding asset like gold is facing a lot more competition for a place in portfolios. Even concern around banking sector risks and the US debt ceiling failed to rouse many inflows,” the bank said. 

The economic data then is important, the bank said, as is the direction of rates and yields. “While the trend line looks most similar to 2011, the relationship still suggests real yields need to fall for gold to rise from here. Our economists are calling for real yields to end the year at 1.15%,” the bank explained.

This, it said, would be enough to take gold back towards the $2000/oz level.