Plunge in gold ETF inflows: Make staggered entry with 5-year-plus horizon

Existing investors should rebalance but avoid complete exit

Net inflows into gold exchange-traded funds (ETFs) fell 78 per cent month-on-month to about ₹5,255 crore in February 2026, down from a record ₹24,039 crore in January. Experts say gold may consolidate in the near term, but could move higher over the medium to long term.

 

Why inflows dropped

 

January saw exceptionally strong inflows. “This was because investors were hedging geopolitical risks and central bank policy uncertainty,” says Manav Modi, commodities analyst, Motilal Oswal Financial Services. Such elevated inflows are difficult to sustain.

 

Profit booking also weighed on flows. “Profit-booking after a strong rally in gold prices reduced fresh inflows,” says Niranjan Avasthi, senior vice-president, Edelweiss Mutual Fund.

 

Rahul Khetawat, fund manager, 360 ONE Asset, is of  the view that the correction in gold prices from the January highs was a major reason for the steep decline in inflows.

 

A shift towards equities diverted money away from gold in February. “Higher short-term bond yields and a stronger dollar also reduced the immediate appeal of gold ETFs for tactical investors,” says Modi.

 

Several positive drivers

 

Experts remain positive on gold’s medium- to long-term prospects. Global de-dollarisation trends may continue to support demand for gold as an alternative store of value. “Emerging markets are diversifying reserves away from the US dollar,” says Jiral Mehta, senior manager - research, FundsIndia. Central bank purchases in 2026 could set a floor to prices.

 

US real interest rates are another important support. “A potential Fed rate cut would weaken the dollar and reduce the opportunity cost of holding gold,” says Avasthi.

 

Ongoing conflicts in the West Asia and Eastern Europe, along with global trade tensions, also support the demand for this safe-haven asset.

 

Inflation shocks could potentially push gold prices higher. A weakening rupee could amplify returns for Indian investors. “Continued equity market volatility is also likely to reinforce gold’s role as a portfolio diversifier,” says Avasthi. Continued physical purchases from India and China would also provide support. 

 

Key risks

 

Gold has delivered exceptional returns over the past few years. “Several valuation indicators suggest it is trading at elevated levels,” says Mehta.

 

According to her, the gold-to-consumer price index (CPI) ratio, gold-to-M2 ratio, gold-to-Sensex ratio, and price-to-mining-cost ratio suggest that gold prices are elevated.

 

Any reversal in the above-mentioned positive drivers could pull prices lower. “A spike in the US dollar index could act as a headwind for gold prices,” says Khetawat.

 

A hawkish US Federal Reserve (Fed) stance for longer than expected is another key risk. “Even if rate cuts are fewer or smaller than expected, the impetus for further gains could fade,” says Sharwan Goyal, fund manager, UTI Mutual Fund.

 

Nehal Meshram, senior analyst, manager research, Morningstar Investment Research India, says gold prices could also come under pressure if bond yields rise.

 

A resolution of major geopolitical conflicts could also weaken safe-haven demand. “Gold prices could face downward pressure if investors reallocate funds towards equities and other growth-oriented assets,” says Meshram. Profit booking at elevated levels remains a near-term risk.

 

Near-term outlook

 

Most experts expect gold prices to pause. “Consolidation at elevated levels is more probable than a steep correction or a fresh sharp rally,” says Avasthi. He adds that if prices rise further, the pace is likely to be moderate.

 

Khetawat says gold could witness periods of sharp drawdowns and consolidation over shorter horizons.

 

Long-term outlook remains positive

 

The long-term outlook for gold remains positive. “Gold has rallied significantly over the past year, but this does not indicate a definitive peak. The bullish trend remains structurally intact,” says Modi.

 

He says prices are more likely to trend higher gradually than reverse sharply.

 

Advice for existing investors

 

Experts suggest that existing investors stay invested.

 

Avasthi says gold has provided stability, acted as a hedge, and delivered strong returns. Khetawat points to its role as a diversifier within portfolios. “Investors should retain a core strategic position given continued macroeconomic uncertainty,” says Goyal.

 

At the same time, Goyal says existing investors should resist the temptation to over-allocate on the back of recent performance. “Investors should rebalance if gold now forms a larger share of the portfolio than originally intended,” says Avasthi.

 

Advice for new investors

 

New investors may consider gold despite elevated price levels. “They should not attempt to time the market,” says Goyal. He suggests that they adopt a systematic investment approach to average out the acquisition cost.

 

Investors should limit gold allocation to 10-15 per cent of the overall portfolio and enter with a five-year-plus horizon to benefit from full-cycle performance and to ride out short-term volatility.  

---

 

The writer is a Mumbai-based independent journalist