Gold rallies to record high amid US rate cut hopes and geopolitical tensions

Precious metal is expected to hit $2,500, analysts say

Gold has hit a new record on the back of falling US yields. Reuters

Gold rallied on Wednesday to touch a record high of $2,480 driven by mounting hopes of a US interest rate cut in September, after recent comments from Federal Reserve officials.

Weakness in economic data and falling inflationary pressures continue to pressure bond yields, which help to boost the appeal of low and zero-yielding assets, keeping the gold outlook positive.

Gold prices hit a high of $2,449.89 on May 20 amid a rally that happened against traditional headwinds, such as a strong dollar and high interest rates. The metal was trading at $2,473.2 at 11.56am UAE time on Wednesday.

“Gold hit a fresh record on the back of falling US yields, that decrease the opportunity cost of holding the non-interest bearing gold, and on the back of rising geopolitical tensions on news that Iran reportedly tried to kill Donald Trump in the past weeks, although there has been no evidence that the weekend’s shooting has anything to do with them,” says Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“It’s probably just a matter of time before we see the yellow metal hit the $2,500 per ounce milestone.

“Some profit-taking could kick in at that level, though, given that at the current levels, gold is entering the overbought market territory, suggesting that the yellow metal may have been bought too fast in a too short period of time – as the rest of the assets that have been boosted by the super duo of Trump and [Fed chairman Jerome] Powell – and it would be healthy to see some minor downside correction.”

Markets expect a rate cut of at least 25 basis points by the Fed at its September meeting, followed by two more before the end of January 2025. The allure of non-yielding bullion tends to rise when interest rates fall.

Mr Powell said on Monday that recent inflation readings “add somewhat to confidence” that the pace of price increases is returning to the central bank’s target in a sustainable fashion, remarks that suggest a turn to rate cuts may not be far off.

Fed governor Adriana Kugler on Tuesday also expressed cautious optimism that inflation is returning to the US central bank's 2 per cent target.

The US Labour Department reported last week that the core consumer price index fell in June for the first time in more than four years, with the annual rate slowing to 3 per cent from 3.3 per cent in May. Markets are now awaiting the release of US monthly retail sales data for new directional momentum.

The Bank of America issued a note in June suggesting that gold could hit $3,000 an ounce over the next 12 to 18 months. The key is investment demand, the lender said.

Data from the World Gold Council trade body suggests central banks are feeling increasingly warm towards gold as a useful financial asset, rather than a historic keepsake.

Top consumer China still has plenty of appetite for official gold purchases despite pausing in May and June, as its bullion holdings remain low as a share of reserves and geopolitical tensions persist, according to a policy insider, industry experts and data.

Locally, the Central Bank of the UAE's gold reserves reached Dh20.36 billion by the end of April 2024, a 12 per cent increase from the same period in the previous year, said Vijay Valecha, chief investment officer at Century Financial.

The latest data published by the central bank also indicated that its gold stockpile grew by 3.5 per cent month on month, rising from Dh19.615 billion in March 2024, he added.

“There is no doubt that the recent surge in gold prices can be at least partially attributed to a declining dollar and falling bond yields, thanks to weaker-than-expected US data and an unexpected drop to 3 per cent in US consumer inflation last week,” said Fawad Razaqzada, market analyst at City Index and Forex.com.

“These factors have enhanced the attractiveness of assets with low or no interest returns.”

The metal has shown resilience against dollar strength at various points throughout this year, indicating that investors view gold as more than just a foreign exchange product, he said.

Its appeal lies in wealth preservation, particularly as years of high inflation have significantly diminished the purchasing power of fiat currencies around the globe. Gold continues to attract interest for its value retention capabilities, he added.

“Technical indicators suggest continued bullish momentum, making bullish trades favourable over bearish ones with the potential to reach new record highs soon,” Mr Razaqzada said.

The gold trend appears strongly bullish in the near term due to growing expectations that the Fed will start cutting interest rates in September, said Rania Gule, market analyst at XS.com.

Dovish remarks from Mr Powell increased hopes for the beginning of monetary easing soon, adding to the rate-cut trend and further boosting gold prices, she added.

“Here, the price could be influenced by upcoming data, increasing its sensitivity in either upward or corrective downward directions, so traders and investors should exercise caution," Ms Gule added.