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(Kitco News) — After a strong start to the first quarter of the year, investment demand for gold-backed exchange-traded funds (ETFs) began waning last month as investors began preparing for monetary policy tightening by the Federal Reserve, according to the latest data provided by the World Gold Council.
In a report published on Friday, the WGC said that 43 tons of gold flowed into the paper ETF market in April. Inflows raised total global holdings to 3,869 tons, valued at $238 billion. Total holdings are just 1% below an all-time high of 3,922 tonnes in November 2020.
“While this is 77% lower than the previous month, which was the strongest since February 2016, it is the fourth consecutive month of inflows, maintaining the momentum of quality outflows seen this year,” the analysts said. “Gold faced pressure during the month as yields rose sharply – and US 10-year real yields turned briefly positive for the first time since 2020 – in response to progressively more hawkish central bank comments, while the US dollar strengthened significantly.
Despite strong investment demand, gold prices ended last month 2% lower.
Looking at the regional gold markets, Europe saw the strongest investment demand for the precious metal last month. Listed European funds saw inflows of 26 tons last month, taking regional holdings to a new record high of 1,692 tons.
“Regional inflows were again concentrated in the United Kingdom, Germany and France, which all posted a record level of holdings during the month. Switzerland-listed funds bucked the trend with slight net outflows,” the analysts said. “European investors continue to seek exposure to gold amid the backdrop of record high inflation exacerbated by concerns over energy supplies, slowing economic growth and geopolitical turmoil.”
North American listed funds saw inflows of 18 tons in April.
“While interest rate expectations rose during the month, investor concerns about slowing economic growth and rising inflation remained unabated, driving demand for hedges like gold and commodities,” analysts said.
Meanwhile, listed Asian funds posted a one-ton outflow last month.
While investment demand for gold has been doing well since the beginning of the year, some analysts suggest that the Federal Reserve’s monetary policy is starting to weigh on sentiment. According to reports, gold exchange-traded funds saw their first outflows last week, ending 14 consecutive weekly gains.
Last week, the Federal Reserve raised interest rates by 50 basis points, the largest increase in 22 years. Federal Reserve Chair Jerome Powell rejected market expectations of a 75 basis point move; However, the central bank indicated the possibility of two additional moves of 50 basis points.
Adam Berlaki, chief analyst at WGC, said gold prices still have a way to go, even with higher interest rates.
“Inflows throughout April, despite higher yields and higher interest rate expectations, suggest that investors remain concerned about rising inflation and slowing economic growth. Given the risks of a stagflationary environment, demand for liquid hedges such as gold has continued to rise, especially among “European and North American money,” he said.
Birlaki added that gold investors should pay attention to the US dollar, which is trading near its highest level in nearly 20 years. He said the US currency could have the biggest impact on the precious metal.
“Historically, a strong dollar has maintained a negative correlation with the price of gold, which indicates that the asset may face headwinds in the future. However, it is important to keep in mind that the reaction of gold can be influenced by the drivers behind the strengthening of the dollar, not by the trend alone.” “If the dollar remains strong due to hawkish central banks and higher yields, gold will likely be negatively affected, but if the rally is due to risk sentiment and continued geopolitical tensions, gold may rise.”
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