Gold briefly hit a record high as the prospect of a US interest rate cut and growing concerns over the Federal Reserve's future provided fresh impetus to the precious metal's multi-year rally.

Gold bullion for immediate delivery rose as much as 0.9% on Tuesday to reach $3,508 an ounce, surpassing its previous high set in April before paring gains as the dollar strengthened. The precious metal has gained more than 30% this year, making it one of the best-performing major commodities.

The latest rally was driven by expectations that the US central bank will cut interest rates this month, after Fed Chairman Jerome Powell cautiously opened the door to a rate cut. Friday's key US jobs report is likely to add to signs of a sluggish labor market, bolstering the case for a rate cut. This has boosted the appeal of the non-interest-bearing precious metal.

"Investors increasing their gold allocations, particularly in response to the Fed's rate cuts, are pushing prices higher," said Joni Teves, a strategist at UBS Group AG. "Our base case is that gold will continue to reach new highs over the coming quarters. The lower interest rate environment, weaker economic data, and growing macroeconomic uncertainty and geopolitical risks are enhancing gold's role as a portfolio diversifier."

Both gold and silver have more than doubled over the past three years, with rising geopolitical, economic, and global trade risks driving increased demand for the long-respected safe-haven asset. President Donald Trump's escalating attacks on the Fed this year have become the latest cause for investor concern, with concerns over the central bank's independence threatening to erode confidence in the US. Read More: Loss of Fed Independence Would Be a Serious Danger, Says Lagarde

Markets are now awaiting a crucial decision on whether Trump has a legitimate basis to remove Fed Chair Lisa Cook from the central bank. If deemed legitimate, such a move would allow the president to replace her with a more dovish official. Separately, a federal appeals court ruled late Friday that Trump's global tariffs were illegally imposed under emergency legislation, increasing uncertainty for American importers and potentially delaying the government's promised economic dividends.

"The last time gold reached $3,500 was during intraday trading, so we want to see if it manages to close the day above that level because that could provide momentum," said Christopher Wong, currency strategist at Oversea-Chinese Banking Corp., referring to the precious metal's peak in April.

"There's still the risk of renewed geopolitical risks and policy uncertainty resurfacing, and that will be supportive for gold." Silver, meanwhile, continues to outperform bullion. The white metal is up about 40% so far this year, with prices breaking through $40 an ounce for the first time since 2011 on Monday. The metal is also valued for its industrial uses in clean energy technologies, including solar panels. Against that backdrop, the market is headed for a fifth consecutive year of deficits, according to the Silver Institute.

A weaker U.S. dollar has also boosted purchasing power in major consumer countries like China and India. Investors have been piling into silver-backed ETFs, with holdings rising for seven consecutive months in August.

This has drawn down the metal's freely available stockpiles in London, leading to persistent market tightness. Lease rates, which reflect the cost of borrowing metal, generally for short periods, remain high at around 2%, well above their normal levels of near zero. Spot gold was little changed at $3,476.58 an ounce at 11:04 a.m. in London. The Bloomberg Dollar Spot Index rose 0.6%, heading for its biggest gain in a month. Silver fell 0.8% to $40.36 an ounce, falling alongside platinum and palladium as the U.S. dollar strengthened. (alg)

Source: Bloomberg