Gold prices dive amid vaccine hopes and rising Treasury yields

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Gold prices tumbled further during Asia hours on Wednesday, a day after the precious metal plunged to a record one-day low overnight.

Prices declined more than 5% to $1,927.39 per ounce on Tuesday – the worst single-day rout in seven years and a far cry from Friday’s record intraday high of $2,089.20. Spot gold prices had shot above the $2,000 level for the first time last week.

By Wednesday morning, spot gold prices plunged further – to $1,876.32, before clawing back gains to trade at $1,917.39 in the afternoon.

Analysts pegged that tumble to rising U.S. real yields on optimism surrounding the virus, among other factors. 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.

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

“Gold prices and  US 10 year real yields have held a strong negative relationship over time. That’s largely because when US yields rise, gold looks less attractive since gold earns no income,” Vivek Dhar, mining and energy commodities analyst from Commonwealth Bank of Australia, said in a note.

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.

Vishnu Varathan, head of economics and strategy at Mizuho Bank pinned the rising yields on a few factors: vaccine hopes, falling number of infections and hospitalization rates in the U.S. A jump in U.S. producer data also helped boost optimism, he added.

“These factors conspired to take out Gold brutally given the crowded long positions,” Varathan wrote in a note on Wednesday.

Gold though is (in) an unprecedented environment and the sharp correction yesterday goes to show that gold price volatility is likely to stick around for a while.

Vivek Dhar

Commonwealth Bank of Australia

There’s been positive news on the coronavirus front too. Russia said Tuesday it has developed the first coronavirus vaccine in the world. While the U.S. seven-day average of daily new cases has dropped by 38% compared with two weeks ago, according to CNBC’s analysis of data compiled by Hopkins.

Meanwhile, the U.S. producer price in July came in better than expected, rising 0.6% versus an expected 0.3% increase according to Dow Jones estimates.

“Risk appetite returned following encouraging economic numbers and news reports of a new effective coronavirus vaccine in Russia increased risk appetite further lowering expectations of further monetary stimulus making Gold less attractive,” said a note by brokerage Phillip Futures.

“The rising US Dollar also did not lend support to precious metals,” it added. The U.S. dollar index was at 93.844 by Wednesday afternoon, up from levels as low as 92 in the past few weeks.

However, Dhar said it’s not time to write off gold just yet.

“Shifting the focus to US 10 year nominal yields is plausible, but we’re not yet convinced that the sharp fall in gold prices yesterday signals a U-turn 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 still mostly play a part.

“Gold though is (in) an unprecedented environment and the sharp correction yesterday goes to show that gold price volatility is likely to stick around for a while,” he concluded.

— CNBC’s Will Feuer contributed to this report.

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