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Gold ETF demand turns positive in May as investors look for safe-haven assets

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(Kitco News) - Investor sentiment continued to improve in the gold market even as prices fell below $2,000 an ounce last month, according to the latest research from the World Gold Council.

In a report Wednesday, the WGC said that 19 tonnes of gold, valued at $1.7 billion, flowed into global gold-backed exchange-traded products in May. This is the third consecutive month that investment demand for gold has increased.

Analysts noted that after substantial outflows in January and February, the gold market is now net positive for the year.

"Strong price momentum earlier in the month incited investors' interests in gold ETFs before giving some back towards the end of May as the gold price pulled back," the analysts said in the report. "In addition, we believe that U.S. debt ceiling negotiations and looming banking industry concerns also led investors to seek safe-haven assets, contributing to the positive trend in May."

The WGC said collectively, global gold ETFs held 3,478 of the precious metal as of the end of May; however, total assets under management fell slightly by 0.4% to $220 billion due to a lower gold price, which fell 0.9% compared to the average price in April.

North American investment demand continues to dominate the market. The WGC said that U.S.-listed ETF products saw inflows of 21.2 tonnes.

"Between January and May, funds in North America accumulated net inflows of US$3.2bn (+47t), dominating global inflows," the analysts said.

European-listed ETFs saw their gold holding fall by 2 tonnes; however, due to currency fluctuations, the value of the assets under management increased by $228 million.

"This difference was mostly due to the mechanics of FX-hedged products in Switzerland and Germany, especially amid currency fluctuations related to US debt ceiling uncertainty," the analysts said. "Positive fund flows during the month were concentrated in the UK and France. But stubbornly high inflationary pressure was a stark reminder to investors that central banks in the region are not yet done with hiking."

In Asia, ETFs saw mild net inflows last month of 0.1 tonnes. The analysts said that outflows from Chinese funds were offset by Japanese and Indian inflows.

China buys gold for seventh straight month, adds 16 tonnes to reserves in May

The stable investment demand for gold came as prices fell sharply after testing resistance near an all-time high above $2,085 an ounce.

The analysts noted that rising bond yields due to shifting interest rate expectations appear to be weighing on prices.

"The 2-year TIP yield is nudging 2.5% – a level that might make some gold investors a little nervous. To boot and along with a more influential US dollar, it has done a better job of explaining recent gold returns than the 10-year TIP yield," the analysts.

Despite gold's latest struggles, the WGC remains optimistic that gold can find some support and resume its uptrend.

"An end to hikes might stop gold dancing to the tune of the 2-year. And it may re-establish a stronger link to the 10-year yield, which currently sits just below 1.5%, almost 100bps lower than the 2-year yield and at a level not historically challenging for gold," the analysts said.

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