Vaccine optimism, gold prices rise amid rising dollar

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Gold prices rose further during the Asia hours on Wednesday, after which the precious metal fell to a record one day overnight.

Prices dropped more than 5% to $ 1,927.39 per ounce on Tuesday – the worst one-day routine in seven years and from Friday’s record intraday high of $ 2,089.20. Last week, for the first time, spot gold prices crossed the $ 2,000 level.

By Wednesday morning, gold prices had dropped further – $ 1,876.32, before trading back to trade at $ 1,917.39 in the afternoon.

Analysts say US real yields have increased on optimism surrounding the virus, among other factors. The dollar has also strengthened, which is bad news for gold as it means the precious metal will be more expensive for those holding other currencies.

Treasury yields jumped on Tuesday, continuing its climb since last week as optimism was based on positive vaccine news.

Vivek Dhar, mining and energy commodity analyst Vivek Dhara of the Commonwealth Bank of Australia said, “Gold prices and US 10-year real yields have created strong negative relationships over time. That’s because when US yields rise Gold seems less attractive., Said in a note.

In such a scenario, the opportunity cost of holding gold, a non-yielding asset, is higher because investors tend toward interest that would otherwise accrue to the acquired asset.

Vishnu Varathan, head of economics and strategy at Mizuho Bank, pinched rising yields on a few factors: vaccine expectations, declining US and hospitalization rates. A surge in US productive figures also helped fuel optimism.

Varathan wrote in a note on Wednesday, “These factors conspired to drive the mob out of gold vandalism for a long time.”

Gold however is an unprecedented environment and a sharp correction yesterday indicates that the price volatility of gold is likely to remain for a while.

Vivek Dhar

Commonwealth Bank of Australia

There has also been positive news on the coronovirus front. Russia said that on Tuesday it has developed the first coronavirus vaccine in the world. Seven-day average daily new cases in the US declined by 38% compared to CNBC’s data two weeks earlier, according to an analysis of data compiled by Hopkins.

Meanwhile, US producer prices came in better than expected in July, with Dow Jones estimating a 0.6% increase to 0.6%.

A note by brokerage Philip Futures said, “The risk has come down, given the risk of the new economic coronovirus vaccine in Russia, and there is an increased risk of further monetary stimulus mitigation.”

He added that the rising US dollar also did not support precious metals. The US dollar index stood at 93.844 as of Wednesday afternoon, down from 92 levels in the past few weeks.

However, Dhar said that it is not yet time to write bedtime.

He wrote in a note, “It is impossible to focus on nominal yields for 10 years, but we are not yet sure that the sharp fall in gold prices indicates a U-turn in the precious metal.”

Dhar said that the theme of weak metal demand, weak dollar and falling yields still remain for the most part.

He concluded that gold is (however) an unprecedented environment and a sharp correction yesterday indicates that gold price volatility is likely to remain for a while.

– CNBC’s Will Feuer contributed to this report.