Gold Prices Plunge as Rate Hike Fears Drive Renewed Outflows from ETFs

Gold Prices Plunge as Rate Hike Fears Drive Renewed Outflows from ETFs​

Spot gold prices have slipped below the critical $4,000 per ounce psychological mark for the first time since November 2025. This retreat comes amid a firmer U.S. dollar and growing market expectations that interest rates will remain elevated for an extended period. The movement highlights the sensitivity of bullion-backed exchange-traded funds to global monetary policy shifts.

ETF Flows Face headwinds Amid Monetary Tightening Bets​

Gold ETFs are currently seeing sustained selling pressure, according to World Gold Council data, which recorded net outflows of 16 metric tons in May. While some funds registered their strongest weekly net inflows since mid-April last week, the overall demand remains subdued. Analysts note that ETF flows are closely linked to U.S. monetary policy and physical product sales.

Standard Chartered noted a growing concern over the state of these investments, stating that at current price levels, more than 200 tons of gold held in exchange-traded funds are reportedly in loss-making territory. This suggests caution among investors who were initially bullish on the metal’s trajectory.

Macro Drivers Fuel Shift Towards Hawkish Fed Expectations​

The initial rally in gold prices, which saw spot bullion reach a record high of $5,594.82 per ounce in January 2025, was largely fueled by expectations that the U.S. Federal Reserve would trim interest rates this year. However, market focus has recently shifted.

Rising energy costs subsequent to the Iran war have intensified inflation concerns globally. This shift is prompting central banks, including the Fed, and investors alike to scale up bets on rate hikes rather than anticipated cuts, which typically weigh heavily on non-yielding assets like gold. Gold prices have consequently retreated approximately 29% from their January peak.

Investor Outlook vs Institutional Caution​

Some market commentators remain optimistic about the long-term viability of gold despite near-term weaknesses in ETF demand. Adrian Ash, head of research at BullionVault, suggested that rising rate forecasts coupled with massive cash raising in the AI sector point toward a bullish outlook for the U.S., if not globally.

Yet, major institutional players are temperamental regarding the necessary revival of ETF buying. Morgan Stanley's forecast of $5,200 per ounce gold for the second half of 2026 is increasingly conditional on improved ETF purchasing and evidence that lower oil prices translate into a more dovish interest-rate environment. Goldman Sachs also toned down its optimism and reduced projections for ETF demand.

Central Bank Demand Offers Crucial Support​

While soft ETF demand presents a clear near-term headwind to the metal’s upward momentum, analysts point to institutional buying as a vital counterbalance. Gold's prior rally was significantly supported by official sector purchases globally. Suki Cooper, an analyst at Standard Chartered, noted that if official sector demand continues its rapid growth trajectory, it has the capability to compensate for shortfalls in terms of private ETF purchasing.