On Wednesday morning, spot gold prices plunged again – to $ 1,876.32, before recovering gains to trade at $ 1,917.39 in the afternoon.
Analysts believed the drop was linked to the rise in US real yields due to optimism about 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 who hold other currencies.
Treasury yields surged on Tuesday, continuing their ascent from last week as optimism soared over positive vaccine news.
“Gold prices and real 10-year yields in the United States have maintained a strong negative relationship over time. This is largely because when US yields rise gold looks less attractive because gold does not bring in any income, ”Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank of Australia, said in a note.
In such a scenario, the opportunity cost of holding gold, a non-performing asset, is higher because investors forgo interest that would otherwise be earned by producing the assets.
Vishnu Varathan, head of economics and strategy at Mizuho Bank, attributed the rise in yields to a few factors: vaccination hopes, declining infections and hospitalization rates in the United States. Rising data on US producers also helped fuel optimism, he added.
“These factors conspired to pull gold abruptly given the crowded long positions,” Varathan wrote in a note Wednesday.
There has also been positive news on the coronavirus front. Russia said on Tuesday it had developed the world’s first coronavirus vaccine. While the seven-day average of daily new cases in the United States has fallen 38% from two weeks ago, according to CNBC’s analysis of data compiled by Hopkins.
Meanwhile, the US producer price in July was better than expected, rising 0.6% against an expected increase of 0.3% according to Dow Jones estimates.
“Risk appetite has returned following encouraging economic figures and press reports on an effective new coronavirus vaccine in Russia, increased risk appetite, further lowering expectations of a new monetary stimulus making gold less attractive, ”said a note from broker Phillip Futures.
“The rise in the US dollar has also not provided support for precious metals,” he added. The US dollar index was at 93.844 on Wednesday afternoon, down from levels as low as 92 in recent weeks.
However, Dhar said it was not yet time to write off the gold.
“It is plausible to focus on US 10-year nominal yields, but we are not yet convinced that the sharp drop in gold prices yesterday signals a turnaround in the precious metal,” he wrote in a note.
Dhar said the themes of safe haven demand for the metal, a weaker dollar and falling yields will always play an important role.
“Gold is however (in) an unprecedented environment and yesterday’s sharp correction shows that gold price volatility is likely to persist for some time,” he concluded.
– CNBC’s Will Feuer contributed to this report.