The Yellow Metal bounces back as US Dollar weakens

Apart from all the other factors that affect gold price movements in international markets, there is one factor that has a certain impact, and it is the weakness or strength of the US Dollar. The US Dollar after a bout of strengthening against currency majors is now gradually giving up the ground that it gained in the last one quarter. Gold prices after dipping to 1690 levels is back now at 1830 levels. The strength of this up-move will squarely depend on the trajectory of the US currency.

Gold appreciates and gold prices move up in times of economic uncertainty. As we had seen last year, the spread of the pandemic and the fall in economic growth led to a rise in gold prices. When the uncertainty factor is removed, the price of gold loses its buoyancy. Yet another factor that can drive up gold prices is inflation. When prices of goods rise, the purchasing power of money comes down. Gold is considered to be an asset which retains its value and acts as a hedge against inflation. This has been the traditional thinking and it has been validated over the years through practical experience.

Looking at the returns which gold has generated over the years, it can be easily seen that there are years when it does well and then there are years when it gives a small, not so significant return. So, there is nothing that is predictable or patterned about the returns. As of May 7, 2021, the returns from physical gold is 9.27 % for five years, 15.20 % for three years, and 2.61 % for one year. This is a typical pattern of gold performance over the years.

The US bond yields rose above the 1.65 % mark against the backdrop of the higher inflationary expectations consequent to the economic growth prospects. But it is only a short while before the drumbeats would start again of a faster economic recovery. The rise in US rates will cap the gains which gold can make at any point in time.

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