In the European session on Friday, spot gold rose by $7 in the short term to hit $2,609 an ounce, setting a new historical high.

Analysts say expectations of a quick rate cut from the Federal Reserve are the main driver of gold’s sharp rally this year. Lower borrowing costs increase the appeal of non-yielding assets such as gold and could also devalue the metal when priced in dollars.

Strong demand for gold jewelry and bars, as well as central bank gold buying, also helped support gold prices.

India accounted for about a third of global demand for gold jewelry last year and has become the world’s second-largest market for gold bars and coins, according to industry group the World Gold Council. A surge in demand for gold jewelry and bars among Indian consumers following recent tariff cuts has helped drive global gold prices to a series of record highs.

India’s gold imports hit a record $10.06 billion in August, according to government data released on Tuesday. That translates into about 131 tonnes of gold imports, the sixth-highest total on record by volume, according to preliminary estimates from consultancy Metals Focus.

High gold prices — up 25 percent since the start of the year — have traditionally dampened demand for gold jewelry in India by curbing price-sensitive buyers in Asia. But the Indian government cut import taxes on gold by 9 percentage points in late July, sparking a new round of demand from the world’s second-largest gold buyer.

“The impact of the tax cuts is unprecedented and incredible and it’s really engaging consumers,” said Philip Newman, managing director of Metals Focus in London.

The reduction in tariffs is good news for Indian jewelry stores like MK Jewels in the upscale Mumbai suburb of Bandra West, where director Ram Raimalani said "demand is very good."

On a recent afternoon, customers packed the store, picking out necklaces and bracelets, and Raimalani expects annual sales to grow by as much as 40 percent during the multi-month festival and wedding season that runs from September to February.

Raimalani praised the Indian government and "Modiji," a title for Indian Prime Minister Narendra Modi, for reducing customs duties on gold.

However, that demand means domestic gold prices are quickly recovering to pre-tax cut levels, said Harshal Barot, senior research consultant at Metals Focus.

"The benefit of the tax cuts has largely disappeared and now prices are rising again, we will see if consumers will buy as much as they did before," Barot said.

Jewelry purchases had been falling before the tariff cuts, with demand in India reaching its lowest level since 2020 in the first half of 2024, according to the World Gold Council.

India’s central bank is also on a gold-buying spree, adding 42 tonnes of the metal to its reserves in the first seven months of this year — more than double its total for all of 2023.

A source familiar with the RBI’s thinking said the gold purchases were a “routine” part of its management of foreign exchange reserves and currency stability.

In China, the world's largest buyer of physical gold, high gold prices mean fewer jewelry sales, but sales of gold bars and coins are increasing, with sales in the second quarter up 62% from the same period last year.

“We observe a strong positive correlation between gold investment demand and gold prices,” the World Gold Council said of China.

All of this helps support physical markets and mitigates the erosive effect that high prices could have on demand.

“This provides a stable bedrock for demand. Gold is easily convertible into currency in parts of Asia,” said Paul Wong, market strategist at Sprott Asset Management, adding that this makes gold a popular choice for savings.

Demand from Western investors has also been a big factor in gold's rise, with net inflows into gold-backed exchange-traded funds reaching $7.6 billion over the past four months.

After hitting a new high on Wednesday, analysts warned that gold prices could be due for a pullback.

“When you have expectations of rate cuts for so long, there is a lot of room for disappointment,” said Adrian Ash, head of research at online gold trading platform BullionVault. “I think precious metals, like any other asset, have room for a correction.”

Whether or not gold prices retreat from their all-time highs, MK Jewels’ Raimalani believes jewellery demand in India is likely to remain strong during the upcoming wedding season.

He said the surge in gold prices had not stopped his clients from buying. “For Indians, they are happiest when prices go up because they already have a lot of gold. It’s like an investment.”

Article forwarded from: Jinshi Data