Gold thumped as China's yuan devaluation spurs rally in dollar

[SINGAPORE] Gold retreated after China weakened the yuan's daily reference rate by the most in two decades 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 per cent to US$1,093.95 an ounce and traded at US$1,099.23 at 1:30 pm in Singapore, according to Bloomberg generic pricing. The metal rose to US$1,109.08 on Monday, the highest level since July 21.

Bullion has dropped 7.2 per cent this year as prospects for a US 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 US$1,000 as US 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 per cent 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 consumer and meets some demand from local output, it also buys metal from overseas and a weaker currency will make imports more expensive. 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.

After the fixing rate was cut 1.9 per cent, the Bloomberg Dollar Spot Index strengthened 0.5 percent, taking gains over the past year to 19 per cent. The yuan fell 1.9 per cent to 6.327 per dollar in Shanghai, and slid 2.3 per cent in offshore trading in Hong Kong.

The move also triggered a rally in Chinese gold equities as their cost of production in yuan declines while the metal is sold in dollars. Shares of Zhongjin Gold Corp and Shandong Gold Mining Co. surged by the exchange-set limit of 10 per cent at the 11:30 am midday break.

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 per cent, as rate-rise speculation increased.

Gold for December delivery fell as much as 1 per cent to US$1,093.30 an ounce on the Comex, and traded at US$1,099.20. Silver for immediate delivery dropped 0.2 per cent to US$15.22 an ounce. Platinum was 0.4 per cent lower at US$981.95 an ounce, while palladium fell 1 percent to US$604.50 an ounce.

BLOOMBERG