Hope of an American economic recovery sends gold prices tumbling

GLOBALGold Prices, which have been on an upward trend since the onset of the pandemic, went tumbling down in mid-August this year as investors warmed up to hopes of a recovering American economy.

Prices declined more than 5% to $1,927.39 per ounce in mid-august this year – the worst single-day rout in seven years and a far cry from the record high of $2,089.20.

Analysts pegged that tumble to a number of factors including rising U.S. real yields on optimism surrounding the virus, the strengthening dollar, and increased production from the North American country.

According to Vivek Dhar, an Analyst at the Common Wealth Bank of Australia, Gold prices and US 10-year real yields have held a strong negative relationship over time.

As a result of the inverse relationship, when US yields rise, gold prices fall as the metal looks less attractive since it earns no income.

In such a scenario, the opportunity cost of holding gold, a non-yielding asset, is higher as investors are foregoing interest that would be otherwise earned in yielding assets.

The dollar has also been strengthening, which is bad news for gold as it means the precious metal will be more expensive for those holding other currencies.

A jump in producer data and a fall in the number of infections and hospitalization rates in the US also helped boost optimism, Vishnu Varathan, head of economics and strategy at Mizuho Bank said.

“These factors conspired to take out Gold brutally given the crowded long positions,” Varathan explained.

He added that the news of the development of the first vaccine by Russia also contributed to the tumbling of gold prices.

“The news of an effective vaccine against corona virus risk appetite further lowering expectations of further monetary stimulus making Gold less attractive,” brokerage firm Phillip Futures explained.

The Gold rally is however expected to still continue as global economies still remain fragile and the US is still in an election period whose outcome has not yet been determined.

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