Both gold and silver are facing pressure, yet potential for upward movement is building. According to the latest research report from Morgan Stanley, the return of ETF holdings is the crucial variable determining whether gold and silver prices can achieve a substantial reversal, and the core prerequisite hinges on one factor: whether the Federal Reserve can avoid raising interest rates again.

Inflation concerns stemming from escalating Middle East tensions have revived expectations for Fed rate hikes, leading ETF investors to continue reducing their holdings of precious metals. Meanwhile, silver's performance has been even weaker, weighed down not only by ETF selling but also by additional pressure from a noticeable decline in industrial demand, such as from the solar sector. Last week, gold and silver prices fell by 2.5% and 6.65%, respectively.

However, Morgan Stanley economists hold a view contrary to market consensus – that the Fed can keep interest rates unchanged this year and implement two rate cuts next year. Recent CPI data showing inflation has begun to cool supports this outlook. Morgan Stanley forecasts fourth-quarter target prices for gold and silver at $4,450 and $65.40 per ounce, respectively, representing potential upside of approximately 11% and 16% from current levels.

Central Bank Purchases Provide a Floor, but ETF Absence Weighs on Gold

The structure of gold demand is undergoing a divergence. While central bank purchases caused market concern from March to April due to selling from Turkey and Russia, the situation has quietly shifted. Turkey was one of the largest official gold buyers in the 2022-2025 cycle. However, after the outbreak of conflict in the Middle East exacerbated its trade deficit and pressured the lira due to import dependence, its central bank was forced to sell gold to stabilize the currency. According to reports, Turkey sold and swapped approximately 60 tonnes of gold in the two weeks following the conflict's escalation. Russia has sold 34.2 tonnes year-to-date, surpassing the 6.2 tonnes for the entirety of 2025, as military spending and fiscal sanctions have widened the federal deficit.

Nonetheless, selling pressure is diminishing at the margins, while buying is accelerating. Turkey's sales volume dropped to 2.7 tonnes in May, and global net selling contracted sharply from 50.6 tonnes in March, with net purchases recorded at 21.5 tonnes in April and 41.2 tonnes in May. The People's Bank of China has been buying gold for 20 consecutive months, with purchases in June jumping to 14.9 tonnes – the highest since October 2023 – bringing the year-to-date total to 40.1 tonnes, already exceeding the full-year 2025 total of 25.8 tonnes. Poland has purchased 63.6 tonnes year-to-date, and Uzbekistan has bought 32.7 tonnes, both far surpassing their 2025 levels for the same period.

In contrast, the absence of ETF buying is more conspicuous. Data shows that ETFs contributed roughly 20% of total gold demand in 2025, with purchases nearing 800 tonnes. However, in the first half of 2026, global gold ETF holdings saw a net increase of only 18 tonnes, with a substantial net outflow of 74 tonnes in June alone. North American ETFs alone saw a monthly outflow of 42 tonnes, contributing to a net outflow of 60.5 tonnes for the first half, becoming the primary source of the current selling pressure. This stands in contrast to Asian ETFs, which recorded a net inflow of 69.7 tonnes in the first half, while European ETFs also remained in positive territory.

The Federal Reserve's Path is the Key Trigger for ETF Flows

Gold ETF holdings have a long-term negative correlation with Federal Reserve interest rates, with U.S. capital being particularly sensitive to this dynamic. Morgan Stanley notes that after Middle East conflict heightened inflation expectations, the opportunity cost of holding gold rose most significantly for U.S. investors. Historical patterns show that large-scale ETF inflows typically begin only a few months before the Fed's first rate cut – a pattern confirmed by the price action leading up to the start of the 2024 easing cycle.

Currently, market pricing implies approximately 1.4 rate hikes by the end of 2026, down from 1.7 at the start of last week, a shift driven by softer-than-expected June CPI data. Morgan Stanley economists believe inflation will continue to moderate in the second half of the year, providing the Fed room to hold steady. However, analysts also caution that a single month's data does not establish a trend, and renewed escalation in the Middle East adds uncertainty to the interest rate outlook. For gold prices, a substantive return of ETF flows requires the market to build higher conviction that the Fed can at least maintain the status quo and pivot towards rate cuts next year.

From a positioning perspective, COMEX gold non-commercial net long positions have rebounded since mid-May, rising to 194,000 contracts as of July 15th, the highest level since February this year. Some quantitative macro funds are re-establishing positions based on themes of expanding fiscal deficits, reserve diversification, and fiat currency debasement. However, technical factors remain a near-term headwind: gold is currently trading below its 200-day moving average, and the 50-day moving average crossed below the 200-day in mid-July, forming a "death cross." This signal prompts trend-following strategies like CTAs to favor selling into strength rather than buying dips, suppressing the pace of any price rebound.

Silver's Industrial Demand Under Pressure, Correlation with Copper Plummets

Silver's situation is more complex than gold's. Year-to-date, silver prices have fallen approximately 21%, far exceeding gold's roughly 6% decline, with the gold-to-silver ratio rebounding from a low of 46 in January to 70. Morgan Stanley argues that silver is facing a dual squeeze from macro headwinds and weakening industrial demand.

Most notably, the price correlation between silver and copper has plunged from 95% in the second half of 2025 to near zero currently. Behind this unusual divergence is a clear weakening in silver's industrial demand, particularly from the solar photovoltaic sector. In 2025, the PV industry accounted for 17% of silver demand, a significant increase from 7.4% in 2019. However, the sector's silver demand fell 6% year-on-year in 2025, and forecasts predict a further 19% decline in 2026.

Silver jewelry demand is also under pressure. Global jewelry and silverware demand fell 8% year-on-year in 2025 and is likely to continue declining in 2026. Major jewelry brands are shifting product lines towards platinum plating and accelerating gold series, further reducing silver procurement.

Silver ETF holdings are following a similar but steeper downtrend compared to gold. Data indicates total known silver ETF holdings have dropped from a peak of about 87 billion ounces at the end of 2025 to 78.4 billion ounces, a decline of roughly 10%, significantly larger than gold's approximately 5% drop over the same period. ETF outflows stem partly from profit-taking after silver prices doubled in 2025 and reflect the dual pressure of a more hawkish Fed outlook on investment demand for industrial metals.

Morgan Stanley believes a renewed rally in silver also requires waiting for Fed hike expectations to fade and for the industrial demand outlook to stabilize. At that point, silver's correlation with copper may re-establish, providing additional support for the price. COMEX silver non-commercial positioning remains largely flat currently, indicating investors are generally still on the sidelines. Morgan Stanley maintains its fourth-quarter silver target price of $65.40 per ounce, with a potential upside scenario target of $97 under certain conditions.