August 11, 2015

Gold Thumped as China’s Record Devaluation Spurs Rally in Dollar

(Bloomberg)- Gold retreated after China weakened the yuan’s daily reference rate by a record to combat a slump in exports from Asia’s top economy, boosting the dollar and hurting demand for bullion.

Gold for immediate delivery lost as much as 1 percent to $1,093.95 an ounce and traded at $1,101.84 at 11:20 a.m. in Singapore, according to Bloomberg generic pricing. The metal rose to $1,109.08 on Monday, the highest level since July 21.

Bullion has dropped 7 percent this year as prospects for a U.S. interest rate rise boosted the dollar, and China’s move on Tuesday added further impetus to a stronger greenback. Goldman Sachs Group Inc. has forecast gold will probably drop below $1,000 as U.S. borrowing costs climb and investors cut holdings in bullion-backed exchange-traded products.

“Many people in the market have been expecting a devaluation but just not a one-off, 2 percent adjustment immediately on the yuan fixing,” Wallace Ng, a trader at Gemsha Metals Co., said from Shanghai. “It will lead to dollar strength, which is bearish for dollar-denominated gold.”

While China is the biggest gold producer and meets some demand from local output, it also buys metal from overseas. The weaker yuan will make imports more expensive for holders of the Chinese currency. Local purchasing power will drop, said Ng.

Policy makers in China are seeking to bolster growth after trade data at the weekend showed that overseas sales tumbled more than expected in July. The unprecedented change to the fixing came after the People’s Bank of China said earlier on Tuesday that a strong yuan was putting pressure on exports.

Fixing Rate

After the fixing rate was cut 1.9 percent, the yuan lost 1.2 percent to 6.2848 per dollar in Shanghai. The Bloomberg Dollar Spot Index rallied 0.4 percent, taking gains over the past year to 19 percent.

The change worsened gold’s “outlook when it is already under pressure from weakening physical demand from the exchange-traded funds,” Xue Na, analyst at Nanhua Futures Co., said by phone from Hangzhou.

Holdings in ETPs fell for the 17th time in 18 days on Monday to the lowest level since 2009, data compiled by Bloomberg showed. The assets shrank by 70.3 metric tons last month, or 4.4 percent, as rate-rise speculation increased.

Gold for December delivery fell 0.5 percent to $1,097.90 an ounce on the Comex. Silver for immediate delivery dropped as much as 0.9 percent to $15.1125 an ounce, and traded at $15.1995. Platinum was 0.6 percent lower at $980.25 an ounce, while palladium fell 0.8 percent to $605.95 an ounce.