Wednesday, August 12, 2015

Gold Recovers as Yuan-Struck Investors Seek Safe Haven

Image result for gold bar 
In China, a rising price could discourage jewelry buyers, but encourage gold investors. Many Chinese consumers hoarded gold jewelry as the price rose to its all-time high of $1,902 an ounce on Sept. 9, 2011. Since then the price of gold and other commodities have fallen as China’s economy has slowed and signs of a U.S. recovery have prompted investments in equities.


HONG KONG—China’s devaluation of the yuan rattled stock markets, triggered fears of a currency war and battered prices of commodities from crude oil to copper. But after a drop in Asian trade Tuesday, the price of gold is rising.

Worries that a lower yuan would reduce buying in China—one of the largest consumers of gold globally—drove the price below a psychological threshold of $1,100 a troy ounce immediately after Tuesday’s devaluation. It has since recovered to a three-week high of around $1,116. Prompting the gains: gold’s status as a store of value during uncertain times.

“It is all about how equities are not doing so well and talk of a currency war that has prompted the move to gold’s safe-haven demand,” said Barnabas Gan, Singapore-based economist with OCBC Bank.
 
The yuan’s fall triggered losses in currencies across Asia. By late morning Wednesday, the Indonesian rupiah and Malaysian ringgit had fallen 1.4% and 0.8%, respectively, against the U.S. dollar, to levels not seen since the Asian financial crisis of the late 1990s. The Philippine peso fell 0.3% to trade at 46.180 to the dollar, a five-year low.

Shares across Asia deepened their slumps, following losses in currency markets. South Korea’s Kospi was down 1.1%, the Nikkei Stock Average 1.2% and the Hang Seng Index 1.1%.

If the lower yuan sparks a currency war, gold could sustain its upward momentum, according to Macquarie : “After all it was similar FX gyrations in January that saw gold post its high of the year of over $1,300/ounce.” 

In China, a rising price could discourage jewelry buyers, but encourage gold investors. Many Chinese consumers hoarded gold jewelry as the price rose to its all-time high of $1,902 an ounce on Sept. 9, 2011. Since then the price of gold and other commodities have fallen as China’s economy has slowed and signs of a U.S. recovery have prompted investments in equities. 

“What will be interesting to see is whether gold sustains this move,” said Ross Norman, chief executive officer of Sharps Pixley Ltd, a London-based gold broker.

Some of the move upward has been prompted by short-covering, he said. Gold fell nearly 1% from the opening price to a low of $1,094.08 an ounce after the devaluation Tuesday, but later settled at $1,108.40, 0.4% above the open. In late trade Wednesday, Spot gold was up around 0.8% in late Asia trade on Wednesday at $1,117.61 per ounce.

A longer-term cloud over gold is the prospect of an interest-rate increase by the U.S. Federal Reserve this year. That would boost the dollar, which tends to trade in the opposite direction of gold prices. But Mr. Norman said a big impact is unlikely, as a rate increase—“probably the most telegraphed event in advance”—has largely been factored in.

Once a short-term interest-rate blip is out of the way, gold could rebound, analysts say. Gold demand also usually peaks in India and China toward the end of the year, which could provide a lift for some time.

Write to Biman Mukherji at biman.mukherji@wsj.com

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