Gold prices edged up on Monday on heightened geopolitical tensions in the Middle East and expectations of a U.S. rate cut in September, with the focus on this week's Federal Reserve policy meeting.

Spot gold rose 0.1% to $2,389 per ounce by 1225 GMT.

Non-yielding gold is up 2.8% so far in July after hitting a record high of $2,483.60 on July 17 on growing optimism of a rate cut from the Federal Reserve in September.

After a benign June inflation report, markets are wagering that the Fed will lay the groundwork for the September rate cut at its policy meeting on Wednesday.

Supporting the demand for gold as a hedge against geopolitical risks were worries of a widening conflict in the Middle East following a rocket strike in the Israeli-occupied Golan Heights.

With the expected nearing of rate cuts, global physically backed gold exchange-traded funds (ETFs), a crucial category of demand, started purchases again after several years of outflows.

Gold ETFs, storing bullion for investors, saw net inflows last week of $0.8 billion, or 9.8 metric tons, according to the World Gold Council. Gold ETFs are heading for the third consecutive month of net inflows of 39 tons in July.

As to the physical demand in major markets, gold prices in China have slumped last week to a discount to the international price, reflecting a sharp decline in offtake amongst jewellery buyers in response to elevated prices, said independent analyst Ross Norman.

Consumption of gold in China, the world's biggest user, fell by 5.6% in the first half of 2024 as demand for gold jewellery tumbled by 27%; however, purchasing of gold bars and coins surged by 46%.

The diverging interest between jewellery buyers and gold investors in China highlights different price elasticity of demand of the two groups, said Amelia Xiao Fu, head of commodity markets at BOCI.

"For jewellery buyers, high prices will deter them from purchases. Investors view gold as an asset and would prefer holding bars and coins which are more liquid if they need to sell," she said.

Spot silver gained 0.4% to $27.99. JP Morgan said that silver prices could average $36 in 2025.

Both platinum and palladium climbed 0.6% to $940.85 and $905.50 respectively.

(Reporting by Polina Devitt in London; additional reporting by Ashitha Shivaprasad in Bengaluru; Editing by Vijay Kishore, Shailesh Kuber and Louise Heavens)