Gold slips on dollar, but stays near 3-week top on Fed doubts

[MANILA] Gold edged lower on Thursday as the dollar firmed, but the metal remained near a three-week peak as a weaker Chinese yuan raised doubts about the pace of expected interest rate hikes by the US central bank.

Investors have been betting that the Federal Reserve could raise interest rates at its next policy meeting in September amid a recovering US economy and job market, but investors are factoring in the impact of China's surprise currency devaluation. "There's a feeling that the devaluation of the yuan may have a tendency to make the Fed more cautious about its monetary tightening," said Ric Spooner, chief market analyst at CMC Markets in Sydney. "While it may not stop the first one, it may very well make them even more gradual in the pace at which they increase rates and that would be because of potentially lower inflation being transmitted by a weaker yuan to international markets." Spot gold was off 0.4 per cent at US$1,120.80 an ounce by 0635 GMT, after earlier peaking at US$1,126.31, its loftiest since July 20. The dollar gained 0.3 per cent versus a basket of currencies.

Bullion has recovered 4 per cent from a 5-1/2-year low of US$1,077 touched in a late July selloff that was fueled by concerns over a looming hike in US interest rates.

US gold for December delivery slipped 0.3 per cent to US$1,120.40 an ounce.

China's yuan fell for a third day on Thursday but the central bank said there is no basis for further depreciation in the yuan currency given strong economic fundamentals.

Still, sources told Reuters that there was some support within the Chinese government for a devaluation of perhaps up to 10 percent to help struggling exporters.

An adjustment to China's currency is probably appropriate if the Chinese economy is weaker than authorities there expected, New York Fed President William Dudley said in the US central bank's first public response to the devaluation of the yuan.

Gold demand hit a six-year low in the second quarter, a World Gold Council report showed, as sluggish prices and the prospect of better returns in equities curbed interest in the metal.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings rose 0.6 per cent to 21.6 million ounces on Wednesday, the first increase in days after falling to the lowest since September 2008.

Spot palladium dropped 0.4 per cent to US$620.25 an ounce after hitting a two-week high of US$627 earlier. Platinum was steady at US$995.25 an ounce and silver fell 0.5 per cent to US$15.41 per ounce.

REUTERS