Investors are flocking back to gold in anticipation of U.S. interest rate cuts later this year, pushing prices of the precious metal to new record highs. On Tuesday, gold (CM:XAUUSD) surged to $2,531 per troy ounce, reflecting a year-to-date gain of over 20%. This impressive rise has been driven by a mix of institutional purchases and bullish hedge fund activity, signaling renewed confidence in gold as a key investment.
Supporting this upward trend, gold exchange-traded funds (ETFs) backed by physical gold have seen substantial inflows since May. The World Gold Council reports that these ETFs have taken in 90.4 tonnes of gold, worth $7.3 billion. Importantly, these ETFs have recorded positive net inflows in seven of the past eight weeks, highlighting growing demand from investors.
Why Are Gold Prices Spiking?
The rise in gold prices can be linked to several factors, with gold’s role as a safe haven during uncertain times being a major one. However, what’s different this time is the increased interest from Western investors. For much of the past 20 months, these investors had largely stayed away, while the earlier gold rally was mainly driven by Chinese investors seeking protection from local market issues.
But now, this has changed. Western investors are returning to the gold market, driven by concerns over rising government debt and geopolitical instability. These worries have made gold more attractive to those looking to protect their wealth. Additionally, demand from India has also played a role in driving up prices, thanks to traditional Diwali purchases and a recent reduction in import duties.
Why Lower Borrowing Costs Make Gold More Attractive?
Another key reason behind the rise in gold prices is the expectation of lower interest rates. According to the U.S. Commodity Futures Trading Commission, bullish bets on gold in Chicago’s Comex market reached a post-COVID high in mid-August, with over 100 tonnes added. This growing interest, especially from U.S. and European investors, shows that many are preparing for potential interest rate cuts.
Understanding the connection between interest rates and gold helps explain this trend. When interest rates drop, borrowing becomes cheaper, making gold more attractive compared to yield-bearing assets like bonds. In a low-interest-rate environment, gold, which doesn’t provide a yield, becomes more appealing because it tends to hold its value better than assets that rely on higher rates to generate returns.
What Is the Outlook for Gold?
The TipRanks Technical Analysis tool is flashing a Buy signal for gold on a daily timeframe. This means traders could consider using any price dips to go long on gold.
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