Gold price jumps to 3 week high as China raises risk of currency war

London (Aug 11)  Gold climbed to a three-week high as China’s devaluation of the yuan spurred concern that other countries may intervene in the currency market. Platinum and palladium advanced.

China devalued the yuan by the most in two decades as policy makers stepped up efforts to support exporters. The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China unified official and market exchange rates in January 1994, adding to fears of another round of international currency devaluations in a bid to make exports more competitive.

“The Chinese move is being seen as potentially restarting the currency war, which creates a climate in which gold will react,” Christin Tuxen, a senior analyst at Danske Bank A/S, said by phone from Copenhagen. “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.”

Bullion for immediate delivery climbed as much as 1.4 percent to $1,119.58 an ounce, the highest since July 20. The metal traded at $1,111.40 at 11:48 a.m. in London, according to Bloomberg generic pricing. Prices have risen for four days, the longest stretch since May.

Currency Markets

China’s devaluation shook global markets just as the currency war appeared to be losing steam in Asia, with Australia and New Zealand toning down calls for weaker rates and Japan refraining from expanding stimulus this quarter. Even with almost all major currencies losing ground against the dollar this year amid rising expectations for increased borrowing costs in the U.S., China maintained a de facto peg since March amid a push for the yuan to win reserve status at the International Monetary Fund.

Gold for December delivery climbed 0.8 percent to $1,112.70 on the Comex in New York. Trading volume was more than double the 100-day average for the time of day.

“If the Chinese government devalues the currency, then investors there may well decide to hold more gold, so the move is not negative for gold,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said by phone.

Holdings in funds backed by bullion fell for the 17th time in 18 days, reaching the lowest level since 2009, according to data compiled by Bloomberg as of Monday. Assets dropped 70.3 metric tons last month, or 4.4 percent.

Source: Bloomberg