Global gold-backed exchange-traded funds (ETFs) recorded net outflows in May as investors shifted towards risk assets and paused after a strong start to the year, while new analysis from the World Gold Council suggested a potential US Federal Reserve rate hike could ultimately prove supportive for gold prices.
The World Gold Council said physically backed gold ETFs recorded net outflows of US$2 billion during May, a sharp slowdown from the strong inflows seen earlier in 2026.
Global assets under management fell 2 per cent month-on-month to US$604 billion, while holdings eased 0.4 per cent to 4,121 tonnes, remaining just below the record high of 4,176 tonnes reached in February.
Although investor appetite weakened during the month, gold ETF flows have remained firmly positive for the year, attracting almost US$17 billion in net inflows and adding more than 91 tonnes of demand.
The slowdown came as gold prices moved sideways following their earlier rally. The precious metal fell 1 per cent in May, ending the month at US$4,546 an ounce and posting modest declines across most major currencies. Improved investor sentiment, lower market volatility and ETF outflows from Asia and the US contributed to the softer performance.
According to the World Gold Council’s Gold Return Attribution Model, there were no major factors driving gold’s performance during the month. Positive risk sentiment acted as a drag on returns, while a weaker US dollar and inflows into European gold ETFs provided some support.
Regional ETF flows revealed a sharp divergence in investor behaviour.
North American funds recorded outflows of US$1.1 billion in May as investors moved to the sidelines awaiting a clearer market catalyst.
The World Gold Council said the opportunity cost of holding gold had increased due to higher rates, a stronger US dollar and changing expectations for the future path of monetary policy.
At the same time, inflation concerns linked to the conflict involving Iran and the US had created additional uncertainty around the outlook for interest rates, prompting some investors to favour other asset classes.
The council said many investors appeared to have rotated back into growth-oriented sectors after missing earlier gains.
“As several of the ‘easy’ consensus macro trades, including gold, played out in Q1, investors who missed the upside or needed to keep pace with benchmarks appear to have rotated back into risk-on sectors such as technology.”
That shift was reflected in broader ETF flows, with global technology ETFs recording their largest monthly inflow since the beginning of 2024. Despite ongoing concerns around stretched equity valuations and the possibility of a market bubble, investors have continued to favour risk assets over defensive exposures.
Europe stood out as the only region to record positive gold ETF flows, attracting US$334 million during the month. Demand was strongest in the UK and Germany, where political uncertainty, fiscal concerns and lower bond yields encouraged investors to seek safe-haven exposure.
Asian funds recorded their first monthly outflow since August 2025, shedding US$1.2 billion. The decline was driven almost entirely by China, where a stronger renminbi, softer local gold prices and improving equity market sentiment weighed on investor demand.
Indian funds also experienced outflows of US$61 million, ending a run of 12 consecutive months of inflows as investors took profits following gains in domestic gold prices.
Australian gold ETFs also recorded modest outflows during the month, contributing to a US$14 million decline across the “other regions” category.
Despite weaker fund flows, activity across the broader gold market remained elevated. Average daily trading volumes increased 3 per cent month-on-month to US$424 billion per day, remaining 15 per cent above the 2025 average and highlighting continued investor engagement with the asset class.
Over-the-counter trading volumes stayed well above last year’s levels, while exchange-traded activity also improved.
Meanwhile, positioning in COMEX gold futures remained relatively neutral. Managed money investors increased their positions modestly through most of May, although selling by other large market participants offset those gains.
The World Gold Council said investors were largely waiting for a catalyst before taking stronger positions.
Looking further ahead, the council argued that markets may be underestimating the possibility of further Federal Reserve tightening.
Following a US rate-cutting cycle that began in 2024, markets have increasingly shifted towards the possibility that inflation pressures could force policymakers to raise rates later this year. Conventional wisdom suggests higher interest rates should weigh on gold through higher real yields and a stronger US dollar. However, the World Gold Council said historical evidence painted a more complicated picture.
“Gold has positively surprised on hikes more than 50% of the time. Its median one-month (21-day) return following hikes – adjusted for the long-run average 21-day return of 0.84% – has been positive.”
The report pointed to several historical examples, including 2006, 2017, 2018, 2022 and 2023, where gold rose after rate hikes as investors interpreted policy tightening as a sign of economic fragility, policy error risks or mounting financial stress rather than economic strength.
The council argued that a weaker US dollar could become a more important driver of gold than interest rates themselves, particularly if investors continue diversifying away from US assets amid concerns about fiscal sustainability and long-term inflation. Demand from central banks, China and India could also provide ongoing support for prices.
Nonetheless, the World Gold Council cautioned that several near-term headwinds remained. Physical demand has softened in some markets, ETF inflows have weakened and escalating tensions around the Strait of Hormuz could trigger an energy-driven inflation shock that lifts bond yields and strengthens the US dollar.
Such an outcome could place further pressure on gold before any longer-term safe-haven benefits emerge.
“Our main models generally associate rate rises with gold price falls, with price rises the exception rather than the rule. The argument here is simply that if hikes ultimately arrive, there is a reasonable case for the exception to occur. Rather than reinforcing confidence, markets may interpret them as evidence of underlying fragility.”
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