Gold prices fall 8.5% in September, but ETFs attract $10 billion: What explains the disconnect?

Gold prices fell sharply in September, but investors continued to pour money into gold-backed exchange-traded funds (ETFs), exposing a divergence between demand for the metal and positioning in futures markets. Global physically backed gold ETFs attracted nearly $10 billion during the month, adding 67.3 tonnes to their holdings even as dollar-denominated gold prices declined 8.5%, according to the World Gold Council (WGC).

Gold ended September at $4,176 per ounce. The decline came as rising US Treasury yields and a stronger dollar made the non-yielding precious metal less attractive relative to interest-bearing assets. The US 10-year Treasury yield climbed 53 basis points to 5.3%, while the US Dollar Index (DXY) strengthened 2%, the WGC said in its September Gold Market Commentary.

So, why did investors continue buying gold ETFs despite the price correction, and what does the divergence reveal about market sentiment?

Why did gold prices fall despite strong demand?

Gold does not generate interest income, making its relative attractiveness sensitive to changes in bond yields. When Treasury yields rise, investors can earn higher returns on government securities, increasing the opportunity cost of holding gold. A stronger dollar can also weigh on dollar-denominated gold prices by making the metal more expensive for holders of other currencies.

The WGC's Gold Return Attribution Model identified rising yields and the stronger dollar as major contributors to September's price decline. A reduction in futures-market positions also added to the downward pressure.

However, these short-term headwinds did not prevent ETF investors from increasing their exposure to gold.

MUST READ: Gold corrects 24.6% from record high: Why Mirae Asset sees an investment opportunity below $4,200

What explains the divergence between ETFs and futures?

Gold ETFs backed by physical metal recorded nearly $10 billion in inflows in September, taking global holdings to a record 4,255.7 tonnes. The quantity of gold held increased even as the market value of those holdings declined.

Assets under management fell 7% month-on-month to $574.2 billion, reflecting the impact of lower gold prices.

In contrast, COMEX managed-money net positions fell by $12 billion, equivalent to 84 tonnes, during September. Total COMEX net long positions declined 13%, or 100 tonnes, to 654 tonnes. Total spreading positions also contracted by 156 tonnes.

The WGC said the liquidation of futures positions likely contributed to the decline in gold prices. The contrasting trends indicate that ETF investors continued adding exposure while futures-market positioning contracted. The data, however, do not establish whether ETF investors were deliberately buying the dip or making longer-term portfolio allocation decisions.

ALSO READ: Russian gold finds new route to China through Hong Kong as Western sanctions reshape trade

Does record ETF demand signal a longer-term shift?

September's inflows capped a record third quarter, during which global gold ETFs attracted $30.74 billion and holdings rose by 211.2 tonnes. Europe led regional inflows with $13.64 billion, followed by North America at $11.73 billion.

UK-listed funds recorded their strongest quarter on record, while Indian gold ETFs attracted $496.2 million in September, taking their year-to-date inflows to $4.71 billion.

The WGC said persistent inflation, elevated energy prices, concerns about equity valuations, particularly in artificial intelligence-related sectors, and bond-market volatility may have reinforced gold's appeal as a portfolio diversifier.

The key question is whether this demand will persist if bond yields and the dollar remain elevated. September's figures suggest that the price correction has not triggered a broad retreat from physically backed gold ETFs. However, continued inflows will need to be assessed alongside changes in interest rates, currency movements and futures-market positioning to determine whether the divergence represents a sustained shift in investor demand.

DO READ: Gold ahead of festive season: Gold’s 26% correction could be a buying opportunity, says Tata MF