Gold ETF Outflows Continue Despite Fed Easing and Record High Prices

Despite a year marked by record-high gold prices and the Federal Reserve's pivot towards easing monetary policy, investors continued to sell off gold-backed exchange-traded funds (ETFs) for the fourth consecutive year, reports Bloomberg.

While the prospect of Fed interest rate cuts in 2024 initially boosted gold ETFs, the momentum was abruptly halted by the outcome of the US presidential election in November. The stronger dollar that followed Donald Trump's victory triggered renewed selling of gold ETFs, as investors shifted their funds away from bullion and into other assets like equities and Bitcoin.

"Investors typically seek safety in bullion in times of political and economic uncertainty," notes Bloomberg. This pattern was evident in 2020, when investors flocked to gold ETFs during the pandemic. However, the tide turned two years later when the Fed embarked on its aggressive interest rate hiking cycle, making non-interest-bearing gold less attractive.

The confluence of geopolitical risks, including ongoing conflicts in Ukraine and the Middle East, has paradoxically driven increased demand for physical bullion. Central banks in emerging markets, Asian investors, and consumers have all sought refuge in gold as a portfolio diversifier and hedge. This shift in demand has further reduced the appeal of gold ETFs.

Despite the ongoing outflows, gold ETFs still hold significant sums. Bloomberg cites estimates from Bloomberg Intelligence that global gold ETFs held over $185 billion in late December. However, the persistent selling pressure highlights the complex interplay of factors influencing investor sentiment toward gold and gold-linked financial products.