"Convention has it that higher policy rates should pressure gold through higher real yields and a stronger US dollar," the WGC noted. However, they argue that "the evidence is mixed," pointing to historical instances where gold has outperformed following policy tightening, especially when such hikes raised concerns about economic growth, financial stability, or policy credibility.
The WGC's analysis highlights that while gold is facing headwinds, it could surprisingly benefit from a rate hike. They argue that "gold has positively surprised on hikes more than 50% of the time," with its median one-month return following hikes being positive. This is contingent on how markets interpret the implications of tightening for growth, inflation credibility, financial stability, and the US dollar.
In terms of regional performance, Europe was the only area to see inflows into gold-backed exchange-traded funds (ETFs), with an increase of US$334 million. This was largely driven by the UK amidst political uncertainty and concerns about the government's fiscal position. Conversely, Asia and North America experienced significant outflows, with Asia witnessing a reversal of flows for the first time since August 2025, amounting to US$1.2 billion, and North America seeing outflows of US$1.1 billion.
"Beyond price action, the opportunity cost of holding gold has also risen amid US dollar strength, higher rates, and adjusted expectations for the future path of US rates," the WGC explained. This has led investors to move to the sidelines while awaiting a clearer catalyst.
Despite the global pullback, gold ETF flows remain positive for the year-to-date, amassing nearly US$17 billion. Global gold ETF assets under management (AUM) declined by 2% month-over-month to US$604 billion, while holdings eased to 4,121 tonnes, just shy of February's record high.
The report also highlighted the mixed signals from the market, noting that "a hike may counterintuitively benefit gold when it happens." The WGC believes that "in prior cycles, hikes often signalled policy credibility and economic normalisation," but in the current climate, hikes may increasingly signal persistent inflation pressure, fiscal stress, and policy error risk.
The WGC pointed to notable historical precedents where gold responded positively to rate hikes. For example, on 29 June 2006, gold was buoyed by concerns over a slowing housing market and mounting growth concerns. Similarly, on 15 March 2017, the hike was interpreted as dovish relative to expectations, leading to a decline in long-end yields.
However, the WGC cautions that the largest near-term risk may come from energy markets. "A sharp rise in energy prices driven by inventory depletion could initially push yields higher, strengthen the dollar, and extend gold's current malaise before the longer-term implications become apparent," they warned.
In terms of trading activity, global gold market trading volumes increased slightly by 3% month-over-month to US$424 billion per day in May, remaining 15% above the 2025 average. Over-the-counter volumes rose by 1% to US$243 billion per day, while exchange-traded activity grew by 6% to US$175 billion per day, driven by higher COMEX activity.
Overall, the gold market is navigating a complex landscape of mixed signals, with potential rate hikes, geopolitical tensions, and energy market dynamics all playing a role. As investors await a clearer catalyst, the WGC's analysis suggests that gold's response to these factors may not be as predictable as conventional wisdom suggests.
