Gold Recovers as Yuan-Struck Investors Seek Safe Haven

The most active gold contract for December delivery gained $10 (0.91 percent) to settle at $1,104.10 per ounce, Xinhua reported.

Spot gold was up 0.5 percent at $1,114.40 an ounce by 0623 GMT, after peaking at $1,119 on Tuesday, its highest since July 20.

The sudden move by the People’s Bank of China to devalue the renmibi on Tuesday – after a string of disappointing data stemming from the Chinese market – led to dollar strengthening, which is bearish for dollar-denominated gold.

The U.S. dollar turned lower after Fed Vice Chairman Stanley Fischer said the global deflationary trend “bothers” the Fed but is one of many factors it is watching, stoking uncertainty about a September rate hike.

But that hasn’t stopped many gold bears from using this as an opportunity to disparage the yellow metal.

In fall 2014 and spring 2015, gold was driven by the broad commodity sell-off, especially the drastic plunge of oil prices which was fueled by the stronger dollar, along with concerns over China’s slowdown. In other words, Hug would not be betting against a rise in gold. “The likelihood of other countries taking steps to cap their currencies is greater today than it was yesterday, and that increases the attractiveness of gold”.

Yesterday marked the first time in three weeks that gold spot prices crossed the $1,100 per troy ounce price level, which holds psychological importance for investors. In those decades, mine production was still growing strongly, central banks were selling gold and the West drove global growth prospects. Mine production is expected to dwindle in the coming years. Rural demand for gold accounts for almost two-thirds of India’s total.

Copper prices also received a boost from a weaker dollar.

“Gold’s best moment this year came in the first few months when we saw various FX swings, lots of different central banks cutting interest rates or intervening in their monetary policy, so probably there is some element of that which has helped the rally from Monday continue a bit”, Turner said.

It is heftiest movement for the Chinese currency against the dollar in over 20 years and is in direct response to falling exports and an attempt to stabilise wild volatility in equity markets.

Nevertheless, the medium- and especially long-term case look different because the new drivers of gold demand, particularly in Asia, could prove relatively solid through the 2020s.