The price of gold has surged to historic highs this year, surpassing $2,500 per ounce and catching the attention of global markets.

Gold prices were steady near one-week highs on Friday and on track for a small weekly rise. Spot gold was little changed at $2,518.34 per ounce at 1134 GMT, near a one-week high of $2,523.29 hit in the previous session.

The rise reflects the precious metal’s enduring role as a haven in times of uncertainty, but it also signals deeper structural shifts in the global economy. Historically, gold has been prized as a hedge against inflation and economic instability, often performing well during periods of financial turbulence. Today, these factors are more relevant than ever, with a confluence of challenges – including a weakening US dollar, central bank interventions, and mounting geopolitical tensions – creating the perfect storm for gold to thrive.

The US dollar’s downward momentum has accelerated recently, as expectations of Federal Reserve interest rate cuts later this month grow stronger. Having depreciated by 5 percent from its 2024 peak, the dollar is now approaching its lowest point in nearly a year against a broad range of other major currencies.

For much of the past few years, the dollar’s strength was underpinned by the resilience of the US economy and persistently high inflation, which kept interest rates far above those in other advanced economies. This made dollar-denominated assets particularly attractive. Even after reaching a 20-year high in 2022, the greenback remained elevated due to this competitive advantage.

The Federal Reserve’s anticipated rate cuts are expected to sustain the high demand for gold as investors continue to seek inflation hedges.

“Prospects of US interest rate cuts will lower the opportunity cost of holding a non-yielding asset like gold, making it more appealing,” Ole Hansen, head of Commodity Strategy at Saxo Bank, told Al Arabiya English. “As borrowing costs fall, we foresee renewed demand from Western investors, who have been reducing their ETF, or exchange-traded funds, holdings since 2022, when the Federal Reserve began its rate-hiking cycle.”

Factors supporting gold’s strength

Beyond inflation, which has moderated to more acceptable levels following the pandemic, other factors continue to support gold’s strength.

Analysts argue that investors are watching the US Personal Consumption Expenditures (PCE) index closely, as it’s the Federal Reserve’s preferred inflation measure.

“The latest PCE data showed a year-on-year increase of 2.5 percent, still above the Fed’s 2 percent target,” Marc Pussard, head of Risk at APM Capital, told Al Arabiya English.

Meanwhile, the labor market is showing signs of strain, with the unemployment rate reaching a near three-year high of 4.3 percent in July. This has heightened fears of a potential recession and increased market expectations for a deeper rate cut.

“The CME’s FedWatch tool now reflects a 43 percent chance of a 50-basis-point reduction in September, up from 26 percent just a week ago. If the Fed opts for this larger cut, gold prices could rise even further, as the widely anticipated 25-basis-point move is already priced in,” added Pussard.

Central Bank accumulation of gold reserves

Central banks worldwide have been accumulating gold at a record pace, further pushing prices higher. Countries like China, Russia, and India are actively increasing their gold reserves to reduce reliance on the US dollar. These banks seek to buffer against economic volatility and diversify their reserves away from dollar-based assets.

“Turkey’s central bank is also actively enhancing its gold reserves, purchasing over 120 tons in 2024 alone to counteract currency fluctuations and domestic inflation pressures,” said Pussard. “This pattern is prevalent across emerging markets. Central banks from nations like Uzbekistan, Kazakhstan, and Qatar are expanding their gold purchases as a safeguard against global financial instability and dollar dependency.”

Central banks are likely to sustain or even escalate their gold acquisitions through the end of 2024. This strategic diversification into the yellow metal should enhance the resilience of their balance sheets, better positioning them to manage crises.

Future outlook: Will gold prices continue to climb?

Gold prices have consistently hit record highs in 2024, yet many experts believe the peak is still to come.

Often touted as a “store of value,” gold is favored by investors for its ability to diversify and stabilize investment portfolios while providing protection against potential future risks. Its tangible nature also draws interest from those looking to own assets with enduring value.

The uptick in demand has come not just from institutional investors but also from retail buyers.

“Starting 2022, we’ve seen a significant increase in the demand for gold coins and bars, particularly among clients from medium to low-income brackets. Regardless of the price, there’s a consistent commitment to investing in gold due to its universal liquidity and stable market value,” said Joe Saliba, CEO of Antoine Saliba Jewelry, with locations in the UAE and Lebanon. “Many of our clients have made it a regular part of their investment strategy, purchasing gold on a weekly or monthly basis, which has proven fortunate as prices have continued to rise.”

Analysts note that gold, currently trading cautiously around $2,500, is attempting to break away from its historical pattern of negative returns in September – a trend where it has seen declines in nearly all of the past ten Septembers. After a brief setback to, but not below, the support level at $2,470, the yellow metal quickly recovered.

“Gold’s strong performance since 2022 mirrors the ongoing global unrest, marked by conflicts and financial distrust among nations,” said Hansen. “Also, high levels of government debt further bolster bullion’s appeal as a secure investment. Given these conditions, I believe gold will continue to attract investors from around the world.”

He added: “Nothing progresses in a straight line, and this holds true for gold as well. Despite minor corrections since last October not swaying bullish perspectives, the imminent rate cut could indicate a short-term peak due to pre-anticipated expectations. Nonetheless, any correction should be seen as beneficial, opening doors for late comers to enter the market.”