Gold prices increased by 1.2 per cent to a record high of $2,600.16 in response to the US Federal Reserve's 50-basis point interest rate cut on Wednesday, with bullion expected to remain on an upwards trajectory.

Gold, which tends to benefit from lower rates, erased some of those gains after Fed chairman Jerome Powell said no one should see this as a “new pace” during a press conference. The precious metal was trading at $2,563.27 at 7am UAE time on Thursday. Bullion has registered a year-to-date gain of more than 25 per cent.

The Fed announced a rate reduction for the first time in more than four years. Powell indicated that the tightening campaign had been effective, offering markets hope for a soft landing.

“The outlook for gold remains bullish, earlier fuelled by emerging central bank demand and now the certainty of US monetary easing,” says Arun John, chief market analyst at Century Financial in Dubai.

“Historically, gold performs well during rate-cut cycles – a trend that appears poised to repeat. With a 25 per cent gain year-to-date, further increases seem likely. Historically, over the past three rate-cutting cycles, gold has gained an average of 43 per cent from the peak of interest rates through the cycle.”

The 50-basis point cut signals the Fed's readiness to shield the economy from recession risks, boosting gold's safe-haven appeal. With US elections approaching and potential market volatility ahead, the bullish case for gold holds, John adds.

The price of gold has hit record highs recently as investors became increasingly optimistic about the decline in global interest rates.

Zero-yield bullion tends to be a preferred investment in a lower interest rate environment and during geopolitical turmoil. Lower interest rates typically reduce the opportunity cost of holding gold, which does not generate interest income.

“The prospect of sustained lower interest rates worldwide enhances gold's attractiveness, as investors often turn to this historically stable asset when traditional yield-bearing investments begin to underperform,” says Tony Hallside, chief executive of Dubai prime brokerage firm STP Partners.

“Escalating geopolitical tensions in regions like Ukraine, the Middle East and among major global powers including the US and China, have steered investors towards safe-haven assets, with gold being the preferred option.”

In the Middle East, militant group Hezbollah promised to retaliate against Israel, accusing it of triggering deadly explosions in Lebanon on Tuesday and Wednesday.

On the physical front, India’s August gold imports stood at $10.06 billion, compared with $3.13 billion in July, according to the country's Trade Ministry.

“Several key factors have contributed to gold’s recent surge. These include heightened geopolitical tensions, particularly in the Middle East, growing expectations of a shift in the US interest rate cycle from hikes to cuts, fiscal instability and central bank demand,” says Ole Hansen, head of commodities strategy at Danish lender Saxo Bank.

“Additionally, speculative buying from hedge funds, along with the continuing theme of de-dollarisation, has accelerated the upwards trend. Fear of missing out is also fuelling the extended rally, as gold continues to be viewed as a safe haven in an uncertain global economic environment.”

He adds that gold’s outlook remains positive, driven by strong demand from investors and central banks.

The UAE has significantly increased its gold reserves over the past few years. As of April 2024, the Central Bank of the UAE (CBUAE) reported a 12 per cent year-on-year growth in gold reserves reaching Dh20.36 billion ($5.5 billion), up from Dh18.147 billion last year.

The World Gold Council has forecast that 29 per cent of central banks plan to increase their gold reserves in the coming year.

John says that central bank purchases, which surged in response to global uncertainties, have remained elevated, with both 2022 and 2023 seeing more than 1,000 tonnes of gold bought annually – more than double the 450 tonnes purchased in 2021 before Ukraine war.

“Among the latest developments fuelling demand is India’s surge in gold imports. The Indian government’s decision to reduce import duties has significantly boosted gold buying, particularly in Gujarat, a key hub for the gems and jewellery industry,” he says.

“In August alone, gold imports skyrocketed by 429 per cent year over year. Over the past decade, jewellery demand has consistently been the primary driver of gold consumption, and even today, it remains robust.

“What’s different this time is the sheer scale of central bank demand, which is adding extra momentum to the gold market. For instance, in the first quarter of 2024, jewellery fabrication accounted for 534.97 tonnes out of a total demand of 1,200 tonnes, while central banks purchased 289.72 tonnes. For comparison, in the first quarter of 2022, jewellery demand stood at 517.40 tonnes out of 1,109.25 tonnes, with central banks acquiring a mere 82.44 tonnes.”

Meanwhile, after lagging for much of the recent past, exchange-traded funds’ holdings in gold are finally seeing an upwards trend, adding yet another layer to the bullish sentiment, John says.

Hansen agrees. “As the opportunity cost of holding gold decreases, demand from asset managers for gold-backed ETFs is anticipated to rise, providing further price support,” he says.

Hallside also cites strong gold demand from institutional buyers, “which underscores a continued interest in bullion as a reliable hedge against economic instability”.

Moreover, a rate cut can weaken the US dollar, making gold more attractive to foreign buyers, says Mohamed Hashad, chief market strategist at Noor Capital.

“The US dollar’s relative strength has also played a crucial role. A weaker dollar can boost the appeal of gold, which is priced in US dollars. When the dollar declines, gold becomes more affordable for investors holding other currencies. This increased demand can drive up gold prices,” he says.

Considering these dynamics, Hallside predicts that gold is poised to remain a vital part of investment portfolios, especially for those aiming for long-term wealth preservation in these uncertain times.

However, Hansen warns that while strong fundamentals support gold’s rally, there are risks to watch out for.

A key concern is the build-up of speculative long positions – any significant price drop below key support levels could trigger a wave of selling, leading to further declines, Hansen says.

Easing geopolitical tensions could also reduce gold’s appeal as a safe haven, pushing investors towards higher-yielding assets. Lastly, central banks and investors may become cautious about buying gold at such high levels, which could reduce demand and weigh on prices, he adds.

“In terms of specific levels, $2,600 per ounce stands out as the most significant near-term resistance, if only due to its psychological significance as a round number,” says Michael Brown, senior research strategist at online broker Pepperstone.

“To the downside, the prior range highs at $2,530 per ounce are the most obvious level that the bears will need to break, in order to extend any potential downside momentum.”