Outflows from gold ETFs signal caution; how should investors respond?

Existing investors should book partial profits if overweight; new ones should build exposure in a staggered manner

Gold exchange-traded funds (ETFs) in India saw net outflows of $61 million (₹582crore), 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 ₹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 3.1 per cent in the past three months.     

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 the 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 a headwind,” says Deveya Gaglani, senior research analyst - commodities, Axis Direct. Gold tends to underperform when real interest rates move higher. 

Gold prices have already rallied a lot. “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.  

What HDFC AMC’s curbs signal 

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 in gold prices. “The restrictions may protect retail investors from entering the asset class in large blocks after sharp tariff hikes on gold imports. The AMC may be keen to curb speculative frenzy,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.  

“Another reason could be that AMCs may be finding it difficult to source physical gold because of supply issues,” says Kumar.

Experts suggest that investors should be cautious after such curbs. “They act as a risk-management signal rather than a direct predictor of negative returns,” adds Kumar. 

Existing investors: Avoid lumpsum purchases 

Existing investors should avoid allocating fresh lump-sum capital to gold at current price levels. They should review their portfolio’s original target asset allocation. “Consider booking partial profits if the recent rally has made you overweight,” says Kumar. 

While investors should maintain their strategic allocation, they should avoid aggressive accumulation. 

New investors: Build exposure gradually 

New investors, too, should avoid large lump-sum allocations to gold funds at current price levels. “Those who lack gold exposure in their asset mix should build allocation through a disciplined, staggered method such as a systematic investment plan (SIP),” says Kumar. 

New investors should cap their total gold exposure at 5-10 per cent of the total portfolio. Investors should enter with at least a seven-year horizon.