Gold prices surging to record highs

Gold prices have surged to record highs on Thursday backed by expectations of interest rate cuts by the US Federal Reserve and increasing demand for the precious metal as a safe-haven asset amid geopolitical risks. Experts said further fresh highs are possible in the long run, yet there are challenges in the short term due to the growing possibility of a stronger US dollar.

Global spot gold prices soared to new heights on Thursday, peaking at around $2,303 per ounce. Benchmark prices at US futures and options market COMEX peaked at $2,324.80 per ounce, also a historical high.

Joni Teves, precious metals strategist at investment bank UBS, said that one of the significant supports for the continuous surge in gold prices is enhanced market anticipation of interest rate cuts and the weakening of the US dollar.

Gold prices typically move inversely to US bond yields. As rates decline, returns on traditional investments like bonds weaken, prompting investors to seek alternative assets such as gold, thus driving up its price. Lower interest rates tend to weaken the US dollar, making gold more affordable for international buyers, boosting demand.

"This, coupled with the increased demand for safe-haven assets amid global geopolitical tensions such as the Ukraine crisis, has further propelled the rise in gold prices. Moreover, over the past few years, central banks worldwide have continued to increase their gold reserves, providing additional support for gold prices," said Yang Hong, a senior researcher at Ping An Futures.

According to the World Gold Council, central bank demand, a key driver of gold demand in recent years, saw two successive years of over 1,000 metric tons of buying. Annual net demand hit 1,037 tons last year, just short of the record 1,082 tons set in 2022.

Cao Liulong, chief strategist at Founder Securities, said that during a Fed rate hike cycle, gold prices generally decline, but in the current hiking cycle, gold prices continued to soar, indicating a failure of the traditional gold analysis framework.

Cao said accelerated deglobalization is leading to an expanded US dollar credit crack, which is a catalyst for the recent surge in gold prices. There is a possibility that the world may potentially usher in an era without a single reserve currency, offering gold the prospect of a decade-long bull run.

Huang Lichen, an analyst at WolFinance Technology, a Hong Kong-based financial service provider, said that investors still hold high expectations for US Fed rate cuts, suggesting the possibility of gold prices continuing to surge. However, several recent economic indicators from the US have shown improved performance, supporting a rise in the US dollar and thereby putting pressure on gold prices.