The case for long-term investment in gold, however, remains intact.
Kindly note that this illustration generated using ChatGPT has only been posted for representational purposes.
Gold exchange-traded funds (ETFs) in India saw net outflows of US$61 million (Rs 582 crore), equivalent to 0.4 tonnes, in May, reducing total holdings to 116.3 tonnes, according to data from the World Gold Council.
This marked the first monthly outflow in a year.
Meanwhile, HDFC Asset Management Company (AMC) has restricted lump-sum purchases and switch-ins in HDFC Gold ETF Fund of Fund to Rs 10 lakh per permanent account number (PAN) per calendar month.
Gold funds have risen 57.1 per cent over the past year but have corrected 4 per cent in the past three months.
Key Points
- Gold ETFs in India recorded their first monthly outflow in a year, with holdings declining in May.
- Improved risk appetite and profit-booking after a strong rally prompted investors to shift towards equities.
- Central bank buying, rising debt levels and geopolitical uncertainty continue supporting gold’s long-term outlook.
- High prices, weak jewellery demand and elevated real interest rates could weigh on future gains.
- Experts advise gradual gold allocation through SIPs and caution against large lump-sum investments currently.
What triggered the outflows
Investors moved money from the yellow metal to riskier assets.
“Investors rotated money from defensive assets into risk assets such as equities as risk sentiment improved and opportunities emerged in growth-oriented sectors,” says Vikram Dhawan, head commodities and fund manager, Nippon India Mutual Fund.
Import restrictions and supply constraints in the domestic bullion market led to increased utilisation of ETF inventories to meet physical demand.
The spike in crude oil prices increased inflation-related concerns.
“The higher probability of an interest rate hike, rather than a rate cut, and a spike in yields acted as headwinds,” says Deveya Gaglani, senior research analyst – commodities, Axis Direct.
Gold tends to underperform when real interest rates move higher.
“Investors booked profits after the strong rally in gold paused,” says Siddharth Srivastava, head – ETF product & fund manager, Mirae Asset Mutual Fund.
Long-term support intact
The case for long-term investment in gold, however, remains intact.
“It is anchored in the expansion of sovereign balance sheets and the rise in global debt levels,” says Dhawan.
The gradual diversification of global reserves away from the US dollar is another factor that will continue to provide support to gold over the long term.
Central banks have continued to accumulate the yellow metal despite historically elevated prices.
“Central bank purchases in the first quarter of 2026 remained above long-term averages,” says Dhawan.
Ongoing geopolitical uncertainty also supports gold’s performance.
Factors that could weigh on rally
Weak jewellery demand, particularly in India, remains the most immediate headwind for gold.
“Record-high prices have reduced affordability and led to softening of consumer demand,” says Dhawan.
Bouts of volatility in equity markets also cause exits from gold by forcing investors to sell profitable assets such as the yellow metal to meet margin calls or raise liquidity.
Interest rate hikes may weigh on gold prices.
“Elevated real interest rates could increase the opportunity cost of holding a non-yielding asset such as gold,” says Dhawan.
Higher US real yields and a stronger US dollar could act as significant headwinds.
Risks To Gold Rally
Experts are of the view that HDFC AMC introduced curbs on purchases to manage the surge in inflows into gold-linked assets after the rally.
“The AMC may be keen to curb speculative frenzy,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.
He adds that AMCs may be finding it difficult to source physical gold because of supply issues.
Experts suggest that investors should be cautious after such curbs.
“The curbs act as a risk-management signal rather than a direct predictor of negative returns,” adds Kumar.
HDFC AMC Purchase Curbs
Existing investors: Avoid lump-sum purchases
Existing investors should avoid allocating lump-sum capital to gold at current levels.
They should review their portfolio’s original asset allocation.
“Consider booking partial profits if the recent rally has made you overweight,” says Kumar.
New investors: Build exposure gradually
New investors, too, should avoid large lump-sum allocations.
“Those who lack gold exposure should build allocation through a systematic investment plan (SIP),” says Kumar.
They should cap their total gold exposure at 5-10 per cent of the total portfolio and enter with at least a seven-year horizon.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff
Leave a comment