Gold prices rebounded to a three-week high on Tuesday despite a move by China to devalue its currency to revive its slowing economy.
In the international markets, prices of the yellow metal rose more than 1% to $1,120 per ounce, recovering from a five-and-half year low hit recently for a combination of reasons.
The precious metal has suffered heavy losses in the past few trading sessions, as a strengthening dollar dragged gold prices down. The dollar appreciation came on the back of rising expectations over interest rate hike by the US central bank in September.
But a continued slowdown in the world's second largest economy China has prompted the country to devalue the yuan, in order to boost the slumping exports from the country.
As a result, the Chinese exchange rate witnessed its sharpest single-day decline in more than two decades. Initially, the announcement led the US dollar to appreciate, but it quickly gave up gains as doubts over the US Federal Reserve rate hike in September resurfaced.
Fed Vice Chairman Stanley Fischer had said on Monday that the central bank is concerned over "the global deflationary trend", raising uncertainty over the timing of the rate hike.
A deflation in other countries may also lead to a fall in consumer prices in the US, making it difficult for the US Fed to hike interest rate.
"Gold prices just need a new acceleration point. We still expect the interest rates in the U.S., and the dollar, to (provide that)," Phillip Streible, senior commodities broker for RJO Futures in Chicago, told CNBC.
In the domestic markets too, gold prices rose sharply by over 1% to trade at around Rs 25,380 levels, as jewellers stepped up buying to meet the demand during the upcoming festive season.