Fed rate cut hopes spur gold to new record high

Gold surged to yet another record on Tuesday, powered by expectations that the US Federal Reserve will deliver its first rate cut in more than a year this week.

- Issac John [e-mail]

Investors are betting not just on a quarter-point reduction but also on the prospect of further easing as the world's largest economy shows signs of strain.

The Fed, which has held its benchmark rate steady for five consecutive meetings, is widely expected to cut by 25 basis points on September 17, bringing the policy rate closer to 4.1 per cent.

Bullion climbed to $3,686 an ounce in Asia, surpassing Monday's all-time high of $3,685, buoyed by a weakening dollar that touched a seven-week low. Gold has now risen more than 40 per cent this year, outperforming major asset classes including the S&P 500. Analysts point to central bank buying, strong exchange-traded fund inflows, and persistent geopolitical uncertainty as reinforcing factors. Goldman Sachs has suggested that bullion could approach $5,000 an ounce if even a small fraction of private Treasury holdings rotate into the metal.

The ripple effects of a Fed rate cut are expected to be significant for the Gulf countries, whose currencies are pegged to the dollar, obliging central banks in the region to broadly follow US monetary policy. A quarter-point cut from the Fed is therefore likely to be mirrored by the UAE Central Bank, the Saudi Central Bank (SAMA), and others. Lower borrowing costs could ease financing conditions for businesses and consumers, stimulate real estate activity, and support equity markets across the region.