The World Gold Council (WGC) reports that outflows of global gold-backed exchange-traded funds (ETFs) have ended their four-month run of positive inflows, with outflows totalling 53 t, or $3.1-billion, in May.

While this was the largest monthly outflow since March 2021, total holdings remain 8% higher in the year-to-date, at 3 823 t, or $226-billion.

The council says strong bi-directional equity volatility failed to support prices in the reporting month as short-term momentum waned.

The gold price fell by 3.8% in May to $1 839/oz, with a pullback largely driven by the lowest level in net long positioning on Comex futures in a year. The WGC points out that the market suffered from absent buyers and an antipathy towards bonds even though inflation may be peaking.

Although multiple drivers weighed on the gold price in May, it was still more resilient than the 7.5% return suggested by the WGC’s Gold Return Attribution Model.

“Equity market volatility hit the highest levels since the start of Covid-19, with most equity markets in a ‘pullback’ or ‘bear market’ territory. Bond yields and the dollar fell in May, both of which are generally positive for gold,” the council explains.

Looking ahead, the WGC believes notable market participants are joining the chorus of investors who feel that central bank actions might be too little too late.

The council cites some sources as saying that the US Federal Reserve should have moved quicker to raise rates and that the only way to stop the current raging inflation is with aggressive monetary tightening or with a collapse in the economy.

The equities markets have pulled back significantly this year, with most major indices more than 10% lower in the year to date.

The council says equity volatility remains at multi-year highs, but gold volatility is subdued. While gold is useful as a tail hedge, it also works well during sustained stock market pullbacks.

“Although current market conditions are unlike anything we have seen historically, continued equity weakness could very well spark a rally in the gold price.

“While some may worry that gold might struggle if equity markets rally, gold’s recent performance is also a by-product of liquidity sourcing for beaten-up areas of the market. In fact, in the few instances of stock market rallies over recent weeks, gold has also rallied most of the time.

“Additionally, we have found that, historically, gold maintains positive performance in most longer-term stock rallies,” the WGC notes

It reports that all regions saw outflows in May – North America had outflows of 34 t, or $2-billion, European funds dropped 17 t, or $1-billion, while funds listed in Asia and other regions had outflows of 1.3 t and 0.4 t, valued at $77-million and $21-million, respectively.

The council concludes that, ultimately, central bank language and behaviour in coming months will likely be a strong determinant of market action.