Gold ETF Flows Surge: Is Gold Entering a Euphoria Zone?

Euphoria is difficult to identify in real time. It often feels rational while it is building. Investors tend to move toward assets that have delivered the strongest recent returns. That behaviour appears logical until valuations and positioning are examined more closely.

The January 2026 mutual fund flow data suggests that gold may be entering such a phase. Gold ETF inflows have reached unprecedented levels, raising an important question: are investors responding to genuine risk factors, or are they chasing momentum?

January 2026 Gold ETF Flows Break Records

For years, gold ETFs in India typically attracted average monthly inflows of under ₹1,000 crore. Even when gold demand strengthened globally, inflows increased gradually.

January 2026 was different.

• Gold ETFs recorded net inflows of ₹24,040 crore.
• Active equity funds saw net inflows of ₹24,028 crore.
• Silver ETFs added another ₹9,500 crore.

This means that gold ETF inflows alone exceeded active equity inflows. If silver ETF inflows are included, precious metal ETF allocations significantly outpaced equity allocations.

This shift is not marginal. It marks a structural change in investor positioning. When a traditionally defensive asset attracts flows comparable to equity funds, it warrants closer examination.

Is the Rally Truly About Geopolitical Uncertainty?

The most common explanation offered for the gold rally is geopolitical uncertainty. Gold has historically been treated as a hedge during periods of instability.

However, the current global backdrop raises questions.

• The war in Ukraine, while ongoing, does not carry the same shock value it had in 2022.
• Tensions involving Greenland or Iran have largely remained at the level of rhetoric.
• Several nations are simultaneously signing free trade agreements, indicating greater economic integration.

Historically, one of the most significant geopolitical peaks occurred in 1979, when gold touched a major price high. Importantly, today’s gold price is well above the inflation-adjusted peak of 1979.

If geopolitical tension is not at an extreme historical high, then the current price levels must be explained through other forces.

Another narrative driving gold enthusiasm is de-dollarisation. Yet, the US dollar continues to play a dominant role in global trade and reserves. If the dollar were to strengthen meaningfully, the sustainability of the gold rally could face challenges.

This does not invalidate gold’s hedge role, but it suggests that the current rally may be supported by broader behavioural factors.

The Three Pillars of Asset Class Euphoria

Strong bull markets are often built on three pillars. When all three align, euphoria tends to develop.

1. Valuation Stretch

Valuation metrics for gold are difficult to define compared to equities. Gold does not generate earnings or cash flows. However, one data point stands out.

Over the last 14 years, gold prices have risen almost five-fold. Such a sustained rally naturally raises questions about forward return potential.

Unlike productive assets, gold does not generate income. Its value depends primarily on price appreciation and hedge characteristics. When price appreciation becomes the dominant narrative, valuation discipline often weakens.

2. Strong and Accelerating Flows

The second pillar is liquidity and flows.

January 2026 gold ETF inflows of ₹24,040 crore indicate that investor participation is expanding rapidly. The fact that these flows matched active equity inflows signals a broad-based shift in preference.

In addition:

• Silver ETF inflows of ₹9,500 crore show that the momentum is spreading within the precious metals category.
• Retail participation appears to be increasing.

Strong flows can sustain rallies. However, they can also amplify volatility when sentiment changes.

3. Absence of Scepticism

The third pillar is the disappearance of doubt.

Legendary investor Peter Lynch once remarked that when even non-market participants begin offering investment tips, caution is warranted. While this is anecdotal, the principle is relevant.

Healthy bull markets require scepticism. When almost every participant believes an asset can only rise, the risk-reward balance becomes asymmetric.

In the case of gold:

• Price appreciation has been consistent.
• ETF flows are surging.
• Public participation appears widespread.

The combination suggests that scepticism may be diminishing.

Is Gold Still Playing Its Traditional Hedge Role?

Traditionally, gold has been positioned as a portfolio hedge.

A disciplined allocation framework generally suggests:

• 10% to 15% allocation to gold within a diversified portfolio.

The rationale is straightforward:

• Gold has historically shown low or negative correlation with equity.
• It offers stability during periods of equity stress.
• It acts as an insurance asset rather than a return-maximising instrument.

However, the current environment complicates this narrative.

Gold has become more volatile in recent periods. At times, it has moved in tandem with other risk assets rather than providing diversification benefits. When an asset’s volatility rises and correlation patterns shift, its hedge characteristics can weaken.

If gold begins to behave like a momentum-driven asset rather than a stabiliser, the risk profile changes.

What Should Investors Take Away?

The surge in gold ETF flows does not automatically imply that gold is in a bubble. Record inflows alone do not define euphoria.

However, several factors deserve attention:

• Gold prices are significantly above historical inflation-adjusted peaks.
• Flows have accelerated dramatically.
• The hedge narrative may be overstated relative to current global conditions.
• Participation appears broad-based and enthusiastic.

The key distinction lies between strategic allocation and tactical chasing.

Gold’s role in a portfolio is primarily to:

• Provide stability.
• Reduce overall portfolio volatility.
• Act as a hedge during stress periods.

It is not designed to compete with equities in long-term return generation.

When investors increase exposure beyond disciplined allocation ranges solely because recent returns have been strong, risk increases.

The Bigger Question: Stability or Speculation?

Gold’s long-term role remains intact as a diversification tool. Central banks continue to hold it. Investors value it during uncertainty. It has historically preserved purchasing power over long horizons.

The concern arises when:

• Flows are driven more by momentum than allocation strategy.
• The absence of scepticism reduces critical evaluation.
• Investors begin treating gold as a growth asset rather than an insurance asset.

Markets do not signal the exact moment when euphoria peaks. They often look strongest just before momentum slows.

Key Takeaways

• January 2026 gold ETF inflows reached ₹24,040 crore, surpassing active equity inflows of ₹24,028 crore.
• Silver ETFs added another ₹9,500 crore, strengthening the precious metals trend.
• Gold prices are above inflation-adjusted 1979 peaks, raising valuation concerns.
• The rally is being attributed to geopolitical uncertainty, though current global risks are not at historic extremes.
• Strong flows and reduced scepticism are classic indicators of potential asset class euphoria.
• Gold’s primary role remains as a 10–15% hedge allocation, not a return-chasing asset.

Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or mutual fund schemes. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully and consider consulting a qualified professional before taking any financial decision.