A 30% rally in gold this year propelled it to an all-time high of $2,063 last week © Bloomberg

Gold rebounded from its biggest one-day sell-off in seven years on Wednesday, prompting analysts to forecast a period of more steady moves for the precious metal after it soared to record highs last week.

The commodity fell almost 6 per cent on Tuesday, plunging below $2,000 a troy ounce as rising hopes of a new US stimulus package led investors to flee haven assets such as gold and government bonds in favour of equities.

The tumble in gold was accompanied by a sell-off in US Treasuries, with the yield on the 10-year note climbing 8 basis points to 0.65 per cent on Tuesday. Yields move inversely to prices.

The price of silver also fell heavily on Tuesday, dropping almost 15 per cent in its biggest one-day decline since 2008. 

Gold prices reached a low of $1,864 early on Wednesday. By mid-afternoon they had recovered, up 1.3 per cent at $1,935 an ounce.

A 30 per cent rally in gold this year propelled it to an all-time high of $2,063 last week, driven by concerns over the impact of the coronavirus pandemic, particularly in the US, and the vanishing income available from safe assets such as government bonds.

Analysts at Commerzbank and Morgan Stanley said conditions remained favourable for gold, with US real yields — the return investors can expect once inflation is taken into account, if they buy and hold the debt to maturity — still trading deep in negative territory.

Gold, which does not pay interest or dividends, becomes more attractive the further real rates sink below zero.

But Commerzbank added that gold prices were unlikely to return to their recent record levels due to the sell-off in exchange traded funds backed by gold.

SPDR Gold Trust, the world’s largest gold ETF, said its holdings fell 0.3 per cent to 1,258 tonnes on Tuesday. 

A “period of consolidation” from here could last for several weeks, said Commerzbank. “That would also be a healthy state of affairs following the excessive price surge,” it added.

Susan Bates, an analyst at Morgan Stanley, said that it would take “a real reversal in real US interest rates” to bring an end to the strong market for gold. But if US real yields were to move back to zero, she said, that would “spark a sharp sell-off” in the commodity.

Ole Hansen, head of commodity strategy at Saxo Bank, noted that the rally in gold paused on Friday in the wake of a stronger than expected US jobs report — suggesting that the commodity will need a bleaker economic environment to sustain its bull run.

He predicted movements in the gold price from here would be “engulfed in a battle between short-term technical traders looking to sell, as the steep uptrend is broken, and longer term buyers who missed the first move above $2,000/oz”.

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