But if the wave of government bailout money eventually sends prices higher, "gold should be one of the best hedges for investors," it said.
Gold has performed relatively well throughout the last nine years, even through the 2001 deflation scare, the report pointed out.
Market watchers remain at odds as to whether the ongoing financial turmoil will develop into an inflationary or deflationary environment.
Many investors will have to take risky bets on their outlook for prices over this year and the next.
Morgan Stanley thinks that government intervention will eventually manage to avert a multi-year debt-deflation spiral.
"Once policy action gains traction, growth and inflation will quickly return, with the risk of hyperinflation," the report said.
Morgan Stanley's investment strategy remains "patient, prudent," despite their belief in the effectiveness of government intervention.
"We are still in capital preservation mode, but prefer cash as we believe bonds are already pricing in too much deflation," it said.