Gold has reached a historic peak, propelled by several factors including mounting anticipation of US interest rate reductions, investor interest in safe-haven assets, and sustained purchasing by central banks and Chinese investors.

On Tuesday, the price of gold soared to $2,141 per troy ounce, surpassing the previous record of $2,135 set in December, according to LSEG data. It then slightly pulled back to trade at $2,131, marking a 0.8 percent increase for the day.

Spot gold prices hit a fresh all-time high Tuesday, rising more than 1% on the session to change hands at $2,136.70 per ounce. Gold's last record peak was $2,135.40 per ounce, which it hit on December 4.

This surge follows a trend initiated on Friday, sparked by optimism surrounding a potential Federal Reserve rate cut in June following disappointing economic indicators. Gold, being a non-yielding asset, tends to benefit from lower interest rates as investors perceive less opportunity cost compared to investing in bonds.

Over the past 16 months, gold has experienced a remarkable rally, climbing by 30 percent from just above $1,600 per troy ounce in late 2022. This surge has been largely underpinned by robust central bank purchases, particularly from emerging markets, spurred by the US's use of the dollar in sanctions against Russia amid its full-scale invasion of Ukraine.

Additionally, Chinese consumers have significantly contributed to gold's momentum in recent months, seeking refuge for their finances amidst volatility in local property and stock markets.

Despite Western investors playing a relatively subdued role in this rally, gold has continued to flow towards Eastern markets, indicating a broader global interest in the metal.

While gold's current peak is remarkable, analysts note that it comes amidst a backdrop of rising interest rates, with the Federal Reserve's benchmark rate remaining at a 22-year high. However, even with this surge, gold still falls short of its inflation-adjusted peak reached in 1980.

"The big reason here is that we're seeing the market increasingly believing that a Fed rate cut is nearer rather than further away," said Bart Melek, head of commodity strategies at TD Securities. Markets have to be a little bit more convinced for gold to move higher, but ultimately in the second quarter, we do think it can go to over $2,300 plus."

The recent surge in gold prices has been further fueled by concerns over the US economy, highlighted by a significant contraction in manufacturing activity as indicated by the ISM Manufacturing Purchasing Managers' Index for January.

Expectations of a potential rate cut by the Federal Reserve have intensified, with traders now pricing in an 85 percent probability of a 0.25 percentage point reduction by June. Nevertheless, analysts caution that fluctuating expectations regarding rate cuts are not the sole driver of gold's recent movements.

"Geopolitical risks emanating from the Red Sea and a year with a dense election calendar globally will likely see continued strength in retail demand for gold," said Nitesh Shah, commodity strategist at WisdomTree."We wouldn't be surprised if gold gives back some of these gains as the Federal Reserve talks down imminent cuts, but once rate cuts look certain, we expect gold to trade significantly higher."

The Fed Chair Jerome Powell's congressional testimony on Wednesday and Thursday will be closely watched for more clarity on U.S. interest rate path. The next major U.S. economic release will be February's employment report due on Friday. Traders currently see a 72% chance that the Fed will start cutting rates by June, according to the CME FedWatch tool.

New market participants, seeking refuge amidst uncertainty, have flocked to gold, contributing to its rise. Speculative trading has also played a role, with increased volatility in options trading indicating bullish sentiment towards gold prices.

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