(MENAFN- Khaleej Times)

The US Federal Reserve is expected to cut interest rates again this month‭, ‬a move that is likely to continue weakening the dollar, and could prove positive for gold‭. ‬Gold has been on a phenomenal run‭, ‬gaining more than 50‭ ‬per cent in the past year‭, ‬hence many investors wonder what can propel it even further‭. ‬Lower interest rates are one factor that should support it‭, ‬along with strong demand from central banks and investors‭. ‬

‭The Federal Reserve trimmed its benchmark fed funds rate by a quarter of a percentage point in September and is widely expected‭ ‬to cut it again on October 29‭ ‬after weak jobs data in the US‭. "It doesn't seem the gold market is fully pricing in the cut‭,‬”‭ ‬said Suki Cooper‭, ‬head of global commodities research at Standard Chartered‭. ‬This means there could be more buying in the near‭ ‬term‭. ‬Yet‭, ‬gold's rapid run has taken it close to many strategists'‭ ‬targets‭, ‬and some say the yellow metal's prices are ripe for a pullback‭. ‬She added that the latest move higher in gold prices has been in part driven by investors buying exchange traded funds‭ (‬ETF‭). ‬

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Goldman Sachs‭, ‬in fact‭, ‬boosted its price forecast Monday‭, ‬in part because it expects ETF buying to continue alongside central bank buying‭. ‬Goldman strategists now see gold reaching‭ $‬4,900 ‭ (‬Dh18,000‭) ‬per troy ounce by the end of next year‭, ‬up from a previous target of‭ $‬4,300‭ (‬Dh15,792‭). ‬Wells Fargo also recently raised its 2026‭ ‬forecast range from‭ $‬3,900‭ (‬Dh14,322‭) ‬to‭ $‬4,100‭ (‬Dh15‭,‬057‭) ‬an ounce and lowered its outlook for the dollar‭.

Why the recent gold surge?

Uncertainty has been a key driver of gold prices‭ . ‬US tariff policy shook up markets globally in the spring‭, ‬but now that there have been negotiations and agreements between the US and many countries‭, ‬some of the concerns about the economy and inflationary‭ ‬impact have subsided‭. ‬“As rates come down‭, ‬a falling rate environment is supportive of gold‭. ‬But my view is a lower rate environment doesn't really explain the price‭. ‬It really comes down to an uncertainty premium‭,‬”‭ ‬said Chris Louney‭, ‬commodities strategist at RBC Capital Markets‭. ‬

‬I think interest rates and the dollar have a chance to rally‮...‬‭‬and that should be a catalyst as to why gold sells off‭.

Mark Newton

He cited growing debt in the US ‬and elsewhere‭, ‬the US‭ ‬government shutdown ‭, ‬geopolitical risk and softening interest in US‭ ‬assets‭. ‬Strategists say concerns about the independence of the Federal Reserve also drove gold buying and triggered selling of dollars‭. ‬US President Donald Trump soothed some concerns when he said he would not fire Fed Chairman Jerome Powell‭. ‬However‭, ‬he has‭ ‬been highly critical of the Fed's interest rate policy and is attempting to oust Fed Governor Lisa Cook‭. ‬Lower interest rates would make it cheaper for the US‭ ‬to pay for its debt‭. ‬“There's potential for higher gold prices‭. ‬There's upside risk to it when we look out to 2026‭,‬”‭ ‬Louney said‭. ‬

As the price continues to rise‭, ‬some strategists are becoming cautious due to the speed of the gains and bullish attitude surrounding the metal‭. ‬Fundstrat's Mark Newton said gold prices are‭ ‬“stretched”‭ ‬and sentiment is too frothy‭. ‬He expects a sell off within the next four to six weeks‭. ‬He recently attended the CMT Global Investment Summit in Dubai‭. ‬

Will gold prices go higher?

“One of the few themes that everyone is talking about is how bullish gold is from a technical and fundamental perspective‭. ‬That's scary to me‭, ‬as no one was discussing this when gold bottomed three years ago in 2022‭,‬”‭ ‬said Newton‭, ‬who heads global technical strategy‭.

Newton notes gold has not suffered any significant decline this year‭, ‬and he expects a pullback in the next four to six weeks‭. ‬“I don't immediately want to buy the first dip‭. ‬I think interest rates and the dollar have a chance to rally‮...‬‭‬and that should be a catalyst as to why gold sells off‭. ‬The world is starting to see fiscal uncertainty and rates are going to eventually turn back higher‭. ‬That could be‭ ‬the reason gold sells off‭,‬”‭ ‬Newton said‭, ‬adding that he would reassess his target after a sell-off‭. ‬“I like the attractiveness long-term‭.‬”‭ ‬

Cooper said the gold price will be influenced by competing factors into the year end‭, ‬and she expects a correction‭. ‬“This is difficult because historically we tend to look through when the physical market will come in as a buyer‭, ‬or we can look‭ ‬at technical levels which suggest the market is overbought‭,‬”‭ ‬she said‭. ‬One level of technical support on the downside would be‭ $‬3,650‭ (‬Dh13,405‭), ‬she noted‭. ‬

‭ ‬The Indian wedding season from October through December is an important time for physical gold purchases as well‭. ‬But Cooper believes there also could have been plenty of buying by jewellers when prices were lower in the summer months‭, ‬and there currently‭ ‬does not seem to be a lot of Chinese buying after a strong start to the year‭. ‬

She expects gold prices to average‭ $‬3,875‭ (‬Dh14,231‭) ‬per troy ounce next year‭. ‬Standard Chartered is not forecasting further Federal Reserve rate cuts after two more this year though the U.‭ ‬fed funds futures market is pricing in further cuts‭. ‬Under the Standard Chartered scenario‭, ‬the dollar could stabilise and the appeal of gold will not be quite as glittery‭. ‬

Even as equities have rallied‭, ‬you've seen allocations to gold‭. ‬That's a sign these people are cognizant of these broader risks out there‭.‬”‭ ‬

Rbc Capital Markets‭' Chris Louney

Some investment advisers believe gold holdings should amount to about 10‭ ‬per cent of a portfolio though their advice varies‭. ‬Gold is viewed as a hedge against risks‭, ‬and it is expected to smooth out the volatility in holdings such as equities‭. ‬

Some institutional portfolios traditionally have held less than five per cent of their assets in gold‭, ‬but they may have a higher percentage now as the price has climbed‭. ‬“I suspect five per cent is not a ceiling‭, ‬people are willing to let their gold allocations run higher‭,‬”‭ ‬said Louney‭. ‬

Cues from central bankers

Investors in the last several years have been taking their cues from the world's central bankers‭. ‬

Central banks have acquired over 1,000‭ ‬tonnes of gold in each of the last three years‭, ‬double the 400‭ ‬to 500‭ ‬tonnes they averaged per year over the preceding decade‭, ‬according to the World Gold Council‭. ‬RBC expects central banks will buy 850‭ ‬tonnes this year‭. ‬

“Gold is a perceived safe haven ‮...‬‭(‬central bank‭) ‬purchases are still quite strong and for similar reasons, you're still seeing investor allocations into gold‭.‬”‭ ‬Louney said‭. ‬“Even as equities have rallied‭, ‬you've seen allocations to gold‭. ‬That's a sign these people are cognizant of these broader risks out there‭.‬”‭ ‬

Different ways to buy gold

Investors can buy gold in different ways‭, ‬and there are advantages to each‭. ‬A very simple way to quickly gain exposure is to buy‭ ‬an exchange traded fund or equity‭. ‬“If you're buying just a gold mining company or a gold ETF‭, ‬you're just buying a claim on gold‭,‬”‭ ‬said Marc Chandler‭, ‬chief market strategist at Bannockburn Global Forex‭. ‬For many investors‭, ‬“that might be good enough‭.‬”‭ ‬

Others see more security in holding the physical metal‭, ‬but that can also have its downside‭. ‬“If they're buying bullion‭, ‬it's expensive because you need to store it some place and insure it‭. ‬For an instrument that does not get a yield‭, ‬that's more money coming out of your pocket to hold onto gold‭,‬”‭ ‬said Chandler‭. ‬

Gold remains highly desirable and even if it sells off‭, ‬central banks will continue to buy‭. ‬“Gold is the new cool kid when it comes to a reserve asset‭,‬”‭ ‬said Peter Boockvar‭, ‬chief investment officer at One Point BFG Wealth Partners‭. ‬He said investors globally have been diversifying away from dollars‭. ‬“Gold is taking that market share from sovereign bonds‭."

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