Gold prices edged lower in May 2026 as improving investor risk appetite and modest outflows from gold exchange-traded funds (ETFs) dampened demand for the safe-haven asset, according to the latest Gold Market Commentary released by the World Gold Council (WGC). However, the industry body believes a potential shift by the US Federal Reserve towards rate hikes later this year could ultimately prove supportive for bullion.
Gold fell 1.4 per cent in US dollar terms during May, ending the month at USD 4,546 per ounce. The precious metal also declined in most major currencies, although prices rose in India and Turkey due to local currency weakness and policy developments. In India, gold prices gained 4.1 per cent during the month and are up 17.6 per cent year-to-date.
According to the WGC's Gold Return Attribution Model (GRAM), positive market sentiment, lower volatility and gold ETF outflows in Asia and the United States acted as key drags on gold performance. Global investors withdrew around USD 2.3 billion, equivalent to 17.3 tonnes, from gold ETFs during the month. While a weaker US dollar and inflows into European gold ETFs offered some support, these factors were insufficient to offset broader market pressures.
Fed Rate Hikes Could Benefit Gold
The report highlighted a notable shift in market expectations, with investors increasingly pricing in the possibility that the US Federal Reserve may raise interest rates later this year amid persistent inflationary pressures and a resilient economy. While higher interest rates are traditionally considered negative for gold because they raise the opportunity cost of holding non-yielding assets, the WGC argues that historical evidence paints a more nuanced picture.
The council noted that gold has delivered positive returns following more than half of all Federal Reserve rate hikes since 1997. It argued that the broader economic context often matters more than the rate increase itself. In particular, markets may interpret future rate hikes as a sign of underlying economic fragility, policy uncertainty or persistent inflation rather than a demonstration of policy strength.
The WGC cited several historical examples—including rate hikes in 2006, 2017, 2018, 2022 and 2023—when gold prices rose despite tighter monetary policy, largely because investors became concerned about economic growth, financial stability or policy errors by the Federal Reserve.
Dollar More Important Than Interest Rates
According to the report, movements in the US dollar have historically had a greater influence on gold prices than changes in interest rates. The WGC expects medium-term growth and yield convergence, alongside diversification away from US assets, to place downward pressure on the dollar, potentially creating a favourable environment for gold.
The council also noted that demand from major gold-consuming markets such as India and China, along with continued purchases by central banks, remains structurally less sensitive to US monetary policy and could provide long-term support for bullion prices.
Oil Prices Emerge As Key Risk
Despite its constructive long-term view, the WGC cautioned that gold faces several near-term headwinds. Physical demand has softened in some markets, including India, while ETF inflows remain subdued. The report also pointed to the ongoing tensions around the Strait of Hormuz as a significant risk factor.
A sharp rise in oil prices, driven by supply disruptions or inventory shortages, could initially strengthen the US dollar and push bond yields higher, creating additional pressure on gold prices before the longer-term inflationary implications become apparent. The WGC said energy markets are increasingly shaping inflation expectations and bond market movements globally.
While gold remains vulnerable to short-term volatility, the World Gold Council believes the market could benefit if future Federal Reserve rate hikes are interpreted as a sign of economic stress rather than policy credibility. Combined with continued central bank buying, robust Asian demand and expectations of a weaker US dollar, these factors could help support gold prices despite current market headwinds. |
