Gold prices hit a record high of $2,462.4/oz yesterday, extending the recent rally in gold prices. Gold is up almost 20% this year, and this rally is supported by several favorable developments for the precious metal. Because interest rates and gold prices are generally negatively correlated, the rising probability of a Fed rate cut in September has added fuel to gold’s rally in the last couple of weeks. In addition to this, geopolitical uncertainty stemming from tensions in the Middle East and Eastern Europe has also pushed gold prices higher with investors willing to pay higher prices for safe-haven assets such as gold. In addition to these factors, the continued purchase of gold by central banks has also created steady demand for the metal, pushing prices higher.

Why Gold Matters

Gold is generally used as a hedging instrument by active traders and investors to mitigate the market risk associated with their investments. Historically, gold has performed well during recessions and stock market downturns, establishing the fact that gold is generally uncorrelated to other risk assets. For this reason, portfolio managers often allocate a meaningful percentage of their portfolios to gold to profit from gold’s diversification benefits. Empirical evidence also suggests that gold has been a successful hedge against inflation in the past, which makes it a strategically important asset class during inflationary periods.

From a macroeconomic perspective, gold plays a key role as a reserve asset with central banks around the world investing in gold as part of their foreign exchange strategy. The idea is that a sizable gold reserve will protect the local currency from devaluation.

Looking Ahead

Even at all-time highs, Citi analysts find gold an attractive bet today. In a report to clients, Citi analysts wrote that a Fed rate cut in September is likely to drive gold prices further higher. According to Citi, the June CPI print gives a strong reason to believe a rate cut will happen sooner rather than later. Citi has a price target of $3,000 for gold, which implies an upside of around 25%. Goldman Sachs analysts also find gold attractive despite a record bull run. According to Goldman analysts, gold prices will settle around $2,700 by the end of the year. XS.com analyst Rania Gule also sees a strong short-term performance from the precious metal leading to the expected rate cut in September as traders are likely to drive the demand for gold higher in anticipation of positive news. JPMorgan and Bank of America have assigned year-end price targets of $2,500 and $2,400 for gold, respectively.