* Silver rises to more than 7-year high
* Dollar index hovers near two-year lows
* Washington remains deadlocked over a relief package (New throughout, updates prices, market activity and comments)
By Sumita Layek
Aug 5 (Reuters) - Gold prices rocketed to a new record high on Wednesday after smashing past $2,000 for the first time, as a weaker dollar and falling returns on U.S. bonds drove investors to hoard the safe-haven metal.
Gold has soared 34% this year and is one of 2020's best performing assets, with investors buying vast amounts in the hope it will hold its value as the coronavirus pandemic upends markets.
Breaking above $2,000 for the first time on Tuesday and hitting a new high of $2,055.10 an ounce earlier on Wednesday, spot gold XAU= was up 0.9% at $2,035.79 by 1:58 pm EDT (1758 GMT).
U.S. gold futures GCv1 hit a record high of $2,070.30 and settled 1.4% higher at $2,049.30.
Investors fear economic stimulus unleashed in response to the pandemic will trigger inflation that will devalue other assets. Real returns on U.S. bonds have already fallen sharply, making non-yielding gold more attractive.
"We're seeing an ongoing deterioration in the U.S. dollar, U.S. yield curve dropping further and an increase in inflation expectations," said Bart Melek, head of commodity strategies at TD Securities.
"This implies that for the foreseeable future, the opportunity cost of holding gold is going to get less and less."
Deadlock in Washington over a coronavirus relief deal helped weaken the dollar, which competes with gold as a safe haven. A lower dollar also makes gold cheaper for buyers with other currencies. USD/ U.S. 10-year bond yields fell to minus 1.06% from around 0.1% at the start of the year. US10YTIP=RR
Gold has rallied so fast -- leaping more than $200 in a little over two weeks -- that a correction is due, said Robin Bhar, an independent analyst. Any rebound in Treasury yields and strengthening of the dollar would stall gold's rally and push prices lower, he said.
Silver prices XAG= also surged, jumping as much as 4.3% to $27.13, the highest since April 2013 and was last up 2.8% to 26.73. It has now risen 50% this year, outperforming even gold.
"Silver is gaining on three factors, as a monetary asset like gold, industrial demand improvements as we recover from COVID and stimulus and supply side problems," Melek said.
Elsewhere, platinum XPT= rose 2.7% to $962.63 and palladium XPD= was 1.6% higher at $2,173.49.
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https://tmsnrt.rs/3khxQPe Gold soars as dollar, Treasury yields dip
https://tmsnrt.rs/2XtQ4mW
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