Gold hits new high as weak dollar and Middle East tension boost its appeal

The precious metal touched $2,617.89 per ounce and is up about 27% so far in 2024

Gold, considered a safe haven and a hedge against inflation, is up nearly 35 per cent in the past 12 months. Reuters

Gold prices hit a new high on Friday amid a weakened dollar and simmering tension in the Middle East, a day after it jumped to a record following the US Federal Reserve's first interest rate cut in four years.

The precious metal, which breached the $2,600 level for the first time on Thursday, was up about 1 per cent at $2,613.26 per ounce at 6:33pm UAE time, paring gains after having hit a high of $2,617.89 earlier in the day.

Gold, considered an investor safe haven and hedge against inflation, is now up about 27 per cent year-to-date and nearly 35 per cent in the past 12 months. It surpassed the $2,000 mark in October last year.

Bullion has gained favour among investors amid global geopolitical challenges and economic uncertainty especially in the US and China, the world's two biggest economies.

Gold has dazzled this year, setting a series of records that marked out the precious metal as one of the strongest performers among major commodities.

Its ascent in the first half came courtesy of strong central-bank buying plus Asian purchases, which offset the drag from a rising US dollar, higher Treasury yields and outflows from bullion-backed exchange-traded funds.

The macroeconomic backdrop indicated that central banks were on course to loosen monetary policies due to softening consumer prices and slowing economic growth. Gold, priced in dollars, is inversely correlated with the value of the greenback and interest rates, thus tends to benefit from lower rates.

The Fed on Wednesday then announced a jumbo 50-basis-point rate reduction, marking the start of its first easing cycle in four years to protect the labour market now that inflation is easing. Expectations of another rate cut at the end of the year is also boosting gold's prospects.

Still, questions remain about the economic health of the US, particularly if it can sustain its growth momentum. Gold could also track the coming US presidential election, which is shaping up to be divisive and polarising.

Other central global banks, as expected, followed suit. The rate cut pulled down US Treasury yields, dragging the greenback along with it.

China, meanwhile, is still struggling to get its key manufacturing sector back on track. Factory output and consumption have also weakened.

"The weakening dollar is a primary driver of increased demand for gold, which, despite offering no direct yield, remains attractive to investors looking to safeguard their wealth in an environment where returns from other assets are diminishing," Rania Gule, a senior market analyst at broker XS.com, wrote in a note on Friday.

"Beyond the rate cuts, concerns about slowing economic growth in both the US and China are also key factors supporting gold's rise. The slowdown in the world's two largest economies signals a potential recession, driving demand for safe-haven assets like gold."

Meanwhile, tension in the Middle East also added to gold's appeal. Amid the nearly 12 months of the Israel-Gaza war, pager explosions rocked Lebanon on Wednesday, killing 12 people and injuring nearly 3,000. The continuing Russia-Ukraine war is also adding instability to markets.

"The increase in geopolitical risks strengthens gold’s status as a haven, as investors seek to shield their assets from economic and political volatility," Ms Gule said. "Should these tensions continue, we are likely to see further increases in gold prices."