Gold prices set for best year since 2020: What's driving the rally?

"Gold prices seem to end the year near current levels, while the main driver next year would be the timing and depth of Fed interest rate cuts," Ilya Spivak, head of global macro at Tastylive was quoted as saying in a Reuters report.

The dollar index edged lower on Friday and was poised for its worst yearly performance in three years, boosting gold's appeal for other currency holders. Yields on 10-year Treasury notes languished near their lowest level since July at 3.8424%.

According to Saish Sandeep Sawant Dessai, Analyst at Angel One, a strengthening US dollar and rising Treasury yields counter the support stemming from expectations of Federal Reserve rate cuts in the early months of the following year.

"The rise in US jobless claims also signalled a cooling labour market in the fourth quarter. Despite these factors, investors maintained an 88% likelihood of a Fed rate cut in March, as indicated by the CME FedWatch tool. We expect gold to trade lower towards ₹63,100 per 10-gram levels, a break of which could prompt the price to move lower towards ₹62,930 per 10-gram levels," he said.

Anticipating continued volatility in Friday's session, Rahul Kalantri, VP of Commodities, Mehta Equities, said that gold finds support at $2051-2038 per ounce, with resistance at $2078-2088 per ounce.

"In terms of rupee, gold has support at ₹63,090-62,820 per 10 grams and faces resistance at ₹63,640 and ₹63,790 per 10 grams," he said.

As the year draws to a close, the outlook for gold remains dynamic, influenced by global factors, including central bank policies, geopolitical tensions, and economic indicators.

Motilal Oswal believes that the risk premium on the back of geopolitical tensions, lower dollar Index, higher rate cut expectations, slower growth fears, inflows in ETF, central bank gold bank spree, development in China and green technology and possible rupee deprecation, could keep the floor strong for the metal.

Gold's ability to offer stability and act as a hedge against market volatility makes it an attractive proposition for investors.

However, experts advocate for a strategic allocation of approximately 10-15% of one's overall portfolio towards gold investments.

This allocation will give diversification and serve as a counterbalance, reducing the overall volatility of the portfolio.