Gold Rebounds Sharply on Weaker Dollar, Bargain Hunting

Gold prices surged over 2% on February 4, extending a powerful rally that began the previous day with the metal's best performance since 2008. The move was driven by a combination of bargain hunting and a softer U.S. dollar, which made bullion more attractive to international buyers.

As of 9:12 a.m. Singapore time, spot gold was trading 2.2% higher at US$5,044.74 per ounce. This followed a massive 5.9% gain on February 3, its largest single-day jump since November 2008. The precious metal had previously hit a record high of US$5,594.82 on February 29.

Dollar Weakness Provides Key Support

A key factor fueling gold's recovery was the U.S. dollar, which fell against most major currencies on February 3. Traders appeared to be consolidating recent gains in the greenback, which had been powered by strong U.S. economic data and expectations of a less dovish Federal Reserve after President Donald Trump nominated Kevin Warsh as its next chair. A weaker dollar makes gold, which is priced in dollars, more affordable for investors holding other currencies.

According to Daniel Ghali, a senior commodity strategist at TD Securities, the recent wave of forced selling in precious metals has likely concluded. However, he cautioned that the market's recent turbulence could deter retail investors.

"The intense volatility over the last week could certainly keep retail participants on the sidelines, removing an increasingly important cohort of buyers," Ghali noted.

Volatility Persists After Market Whiplash

The latest price action comes after a period of extreme volatility. In January, precious metals soared on speculative momentum, geopolitical tensions, and concerns over the independence of the Federal Reserve.

However, many market watchers warned that the rally was too large and too fast. This sentiment proved correct when the surge abruptly ended late last week. Gold experienced its most significant plunge since 2013, while silver suffered its biggest daily drop on record.

Analysts at Bank of America expect this elevated volatility in precious metals to continue. Niklas Westermark, the bank's head of EMEA commodities trading, stated that gold possesses a stronger long-term investment case than silver. He added that while market turmoil might influence position sizing, it is unlikely to diminish overall investor appetite for gold.

Banks Maintain Bullish Long-Term Outlook

Despite the recent turbulence, many major financial institutions remain confident in gold's long-term prospects. On February 2, Deutsche Bank reiterated its forecast that bullion will eventually rally to US$6,000 an ounce, signaling that the fundamental drivers for the precious metal remain intact.