Gold prices have lagged behind surging commodity prices this year. Without the support of a solid gold price, S&P/ASX 200 Index (ASX: XJO) gold shares have underperformed both the broader market and their mining peers.
However, the precious metal has made a comeback in recent weeks, pushing to a 3-month high of around US$1,860.
ASX gold shares including Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST) and Newcrest Mining Ltd (ASX: NCM) are also eyeing near-term highs, thanks to firmer gold prices.
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What's behind the gold rally?
Rising inflation expectations
Inflation in the US has accelerated at its fastest pace in more than 12 years. The Consumer Price Index, which measures the cost of a basket of goods and services, increased 4.2% in April compared to a year ago. And well above the US Federal Reserve's target of 2%. However, the 4.2% is measuring against prices at the height of COVID-19.
Federal Reserve chair Jerome Powell has anticipated a short-term spike in prices as the economy rebounds and that the Fed has the tools to deal with higher inflation should it become a problem.
Investors often think of gold as an inflation hedge. Unlike paper money that loses its value, especially as more is printed, gold supply is relatively constant. The expectation that higher inflation is here to stay could be helping gold prices edge higher.
US Treasury yields ease
Gold doesn't bear any yield, so higher yields typically drive the gold price lower.
US 10-year treasury yields surged from lows of 0.50% to as high as 1.76% between August 2020 and March 2021.
During this time, gold prices topped out at US$2,075 on 10 August 2020 and hit a low of US$1,680 by mid-March.
Yields have eased in recent weeks, taking a breather around the 1.60%.
Geopolitical instability
Gold is often referred to as a safe haven asset that is popular amidst periods of rising geopolitical tensions and hostilities.
It's possible the escalating Israel and Palestine conflict could be driving upside volatility in the gold price as calls for ceasefire grow.
Bitcoin crashing?
It could be a coincidence, but the resurgence in gold has coincided with Bitcoin's (CRYPTO: BTC) largest correction since March 2020. Bitcoin has lost almost a third of its value after briefly hitting US$64,899 on 14 April.
Since 14 April, gold has rallied from US$1,700 levels to US$1,876 at the time of writing.
Why ASX gold shares are on watch
ASX gold shares have underperformed both the ASX200 and S&P/ASX200 Materials (INDEXASX: XMJ) index this year. The resurgence of gold could further drive margins for ASX gold miners.
Newcrest for example, is one of the lowest producers in the world, boasting an all-in sustaining cost of US$891/oz. The uptick in gold price makes a significant difference for its profitability and potential dividends.
The Newcrest share price rallied as high as 6% this week to a 7-month high of $29.27. Its shares were unable to hold onto gains, and are currently fetching $28.73.
