The gold-silver reversal is just one piece away—the return of ETF buying, but when?

Gold and silver are both under pressure, but upward momentum is building. According to Wind Chasing Trading Desk, Morgan Stanley's latest report notes that the key variable for a substantial reversal in gold and silver prices is the return of ETF holdings, and at the core of everything is just one premise: whether the Federal Reserve can avoid another rate hike.

Heightened inflation concerns caused by escalating tensions in the Middle East have pushed up expectations of Fed rate hikes again, leading ETF investors to continue reducing their holdings in precious metals. Meanwhile, silver prices have performed even weaker, not only dragged down by ETF selling, but also facing additional pressure from a significant decline in industrial demand, such as solar energy. Last week, gold and silver prices fell by 2.5% and 6.65% respectively.

However, many Morgan Stanley economists hold a view contrary to market consensus—they believe the Fed can keep interest rates unchanged this year and cut rates twice next year. Recent CPI data shows inflation is beginning to cool, supporting this judgment. Morgan Stanley forecasts target prices for gold and silver in Q4 at $4450/oz and $65.40/oz respectively, representing about 11% and 16% upside from current levels.

Central Bank Buying Forms a Bottom, But ETF Absence Drags Gold Prices

The structure of gold demand is undergoing differentiation. Central bank purchases, though causing concerns in March-April due to sales from Turkey and Russia, have seen the situation quietly change. Turkey was one of the largest official gold buyers during the 2022–2025 cycle, but after the Middle East conflict erupted, rising imports worsened the trade deficit, putting pressure on the lira. The central bank was forced to sell gold to stabilize the exchange rate. According to Bloomberg, in the two weeks following the outbreak, Turkey sold and swapped about 60 tons of gold. Russia has sold 34.2 tons so far this year, exceeding the 6.2 tons for all of 2025, with growing military spending and fiscal sanctions expanding the federal deficit.

However, selling is narrowing at the margin, while buying is accelerating. Turkey's sales dropped to 2.7 tons in May; global net selling shrank dramatically from 50.6 tons in March, with net buying of 21.5 tons in April and 41.2 tons in May. The People's Bank of China has purchased gold for 20 consecutive months, with a leap to 14.9 tons purchased in June—the highest since October 2023; the year-to-date total is 40.1 tons, already exceeding 25.8 tons for all of 2025. Poland's cumulative purchases are 63.6 tons, Uzbekistan 32.7 tons, both far above the same period in 2025.

In contrast, the absence of ETF buying is more pronounced. According to the World Gold Council, in 2025 ETFs contributed about 20% of total gold demand, purchasing nearly 800 tons. But in the first half of 2026, global gold ETF holdings increased by just 18 tons, and June saw a massive net outflow of 74 tons, with North America alone accounting for 42 tons outflow in one month, total net outflow 60.5 tons in the first half, making it the main source of selling pressure. By contrast, Asian ETFs saw net inflows of 69.7 tons in H1, and Europe also maintained a positive figure.

Fed Path is the Core Trigger for ETF Return

Gold ETF holdings and Fed rates have a long-term negative correlation, with US funds particularly sensitive to this. Morgan Stanley pointed out that after Middle East conflict raised inflation expectations, the opportunity cost of holding gold was most significant for US investors. Historically, large-scale ETF return typically starts several months before the Fed’s first rate cut—the trend before the rate cutting cycle at end of 2024 confirmed this.

Currently, market pricing for the number of rate hikes before the end of 2026 is about 1.4, down from 1.7 early last week, a shift driven by softer-than-expected CPI data for June. Morgan Stanley’s economists believe inflation will continue cooling in H2, giving the Fed room to stay on hold. But analysts also note that single-month data is insufficient to establish a trend, and renewed escalation in the Middle East adds uncertainty to the rate path. For gold prices, for ETFs to meaningfully return, the market needs higher confidence that the Fed can at least keep rates unchanged and shift toward 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 15, the highest since February. Some quantitative macro funds are rebuilding positions with themes of fiscal deficit expansion, reserve diversification, and fiat currency depreciation. However, technical resistance remains: Gold is trading below its 200-day moving average, and the 50-day crossed below the 200-day in mid-July to form a “death cross,” prompting CTA and other quant funds to prefer selling on rallies rather than buying dips, limiting the slope of price rebound.

Silver Industrial Demand Under Pressure, Correlation With Copper Drops Sharply

Silver’s situation is even more complicated than gold. So far this year, silver prices have fallen about 21%, far more than gold’s ~6%, with the gold-silver ratio rebounding from a January low of 46x to 70x. Morgan Stanley believes silver faces both macro headwinds and declining industrial demand.

Most noteworthy, silver’s price correlation with copper has plunged from 95% in the latter half of 2025 to near zero now. Behind this unusual divergence is weakening industrial demand for silver, especially in the photovoltaic sector. In 2025, PV accounted for 17% of silver demand, up sharply from 7.4% in 2019, but PV silver demand has declined ~6% year-over-year in 2025, with Silver Institute forecasting a further 19% drop in 2026.

Silver jewelry demand is also under pressure. Global jewelry and silverware demand fell 8% year-on-year in 2025, with a further decline likely in 2026. Pandora has shifted toward platinum plating, Tiffany is accelerating its gold series, both reducing purchases of silver.

Silver ETF holdings have moved similarly to gold, but with steeper declines. According to Bloomberg, known silver ETF holdings have fallen from a peak of about 87 billion ounces at end-2025 to 78.4 billion ounces, a drop of about 10%, much greater than gold’s 5% slide over the same period. ETF outflows are partly due to profit-taking after silver doubled in 2025, and also reflect more hawkish Fed expectations doubly suppressing investment demand for industrial metals.

Morgan Stanley believes silver's resurgence also needs Fed rate hike expectations to fade and industrial demand outlook to stabilize; when that happens, silver’s correlation with copper may recover, providing additional support for prices. COMEX silver non-commercial positions remain basically flat, showing that investors are overall still on the sidelines. Morgan Stanley maintains a Q4 target price for silver of $65.40/oz, with an upside scenario target of $97.

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