Why is gold firming up amid economic gloom?

New York: Gold prices rose on Wednesday as expectations for a massive US stimulus to help the world's largest economy recover from the coronavirus jolt bolstered bullion's appeal as an inflation hedge and pressured the dollar.

Spot gold gained 0.5 per cent to $1,848.30 per ounce by 0239 GMT. U.S. gold futures added 0.4 per cent to $1,847.30.

Janet Yellen, US President-elect Joe Biden's Treasury Secretary nominee, at her confirmation hearing on Tuesday urged lawmakers to "act big" on coronavirus relief spending, adding that the benefits outweigh the expenses of a higher debt burden.

"Given the very dovish approach from Yellen as well as Biden's stance towards fiscal stimulus, gold is responding to the idea of higher inflation expectations," said Howie Lee, an economist at OCBC Bank.

Although in the near term, gains in gold will be limited due to higher yields and some dollar strength, he added.

The dollar index eased further from a four-week high hit earlier in the week, while most U.S. Treasury yields fell after Yellen said that tax cuts enacted in 2017 for large corporations should be repealed.

Yield limitations

Lower Treasury yields reduce the opportunity cost of holding non-yielding bullion.

Biden will be sworn into office on Wednesday and investors will be focused on his $1.9 trillion stimulus package plan to boost the economy and speed up the vaccine distribution against COVID-19, which has claimed 400,000 deaths in the country.

Bullion is considered a hedge against inflation and currency debasement that can result from widespread stimulus.

"Gold at $2,000 is still achievable, probably by the mid of second quarter, when a good amount of people get inoculated and there is so much cash in the system with demand almost coming back to normal, people will start looking at inflation very closely," Lee said.

Among other precious metals, silver climbed 0.9% to $25.42 an ounce. Platinum rose 1.2% to $1,096.23 while palladium gained 0.4% to $2,361.79.