Gold's Split Personality: Physical Demand Surges to Record $193B While ETF Investors Pull Back on Rate Fears

Physical gold demand hits record $193B in Q1 driven by central banks and Asian retail, while ETF outflows persist due to hot US inflation and hawkish Fed. Gold at $4,722, up 9% YTD.

The gold market is experiencing a rare schism. While physical demand for bars, coins, and central bank reserves has hit a record $193 billion in the first quarter, ETF investors are staging a cautious retreat amid fresh inflation scares and a hawkish pivot from the Federal Reserve.

April’s $6.6 billion inflow into physically backed gold ETFs might look like a turnaround after March’s record $12 billion exodus, but the devil is in the details. The recovery was led by Europe ($3.7 billion) and Asia ($1.8 billion), while North America managed just $1.0 billion. Moreover, the largest gold ETF, the SPDR Gold Shares, saw its holdings slide 6 tonnes to 1,033.20 tonnes — the lowest since October 2025 — with net outflows of $180 million between April 30 and May 6 pushing the year-to-date tally to $5.5 billion.

The root of investor caution is clear: US inflation is running hot. The April consumer price index rose to 3.8%, above the 3.7% forecast, while the core rate came in at 2.8%, also exceeding expectations. Markets now price in a probability of over 70% that the Fed will raise rates by April 2027, and Morgan Stanley strategist Matt Hornbach expects no rate cuts at all in 2026.

The appointment of Kevin Warsh as the new Fed chair, expected to be confirmed by the Senate this week, adds another layer of uncertainty. Warsh has signaled an aggressive balance-sheet reduction combined with short-term rate cuts — an unconventional mix that could rattle gold's appeal as a non-yielding asset.

Yet gold has remained surprisingly resilient, trading near $4,722 an ounce, still up nearly 9% year-to-date, though some 13% off its record high. The biggest backstop comes from central banks and retail investors in Asia. The People's Bank of China added another 8 tonnes in April, lifting its reserves to roughly 2,322 tonnes. Poland’s central bank was the largest sovereign buyer in the first quarter, snapping up 31 tonnes, with total central bank purchases estimated at 244 tonnes.

Private demand for physical bullion is also booming. Global bar and coin demand reached 474 tonnes in the first quarter, a 42% jump from a year earlier. Gold bars alone surged 50% to nearly 398 tonnes, reflecting a flight to safety that ETF flows have not captured.

Geopolitical tensions are providing additional support. The Strait of Hormuz remains effectively closed, pushing oil above $100 a barrel and feeding inflationary pressures. President Donald Trump described the US-Iran ceasefire as on "massive life support" and rejected Tehran’s peace proposal, keeping the risk premium elevated.

The next test comes with the US producer price index release on May 13. If the PPI also surprises to the upside, selling pressure on gold could intensify, pushing the 50-day moving average resistance at $4,759 further out of reach. A softer reading, however, would validate the recent ETF inflows and provide a platform for the next leg higher.