By Barani Krishnan
Investing.com – China’s central bank says it won’t let the yuan fall too sharply, but gold longs aren’t taking chances, pushing the yellow metal to new six-year highs as safe-havens remained in play on Tuesday as a hedge to the devaluation and heightened U.S.-China trade war.
Spot gold, reflective of trades in bullion, traded at $1,471.61 per ounce by 2:12 PM ET (18:12 GMT), up $7.72, or 0.5%, as China allowed the yuan to tumble to its weakest level in a decade against the dollar to retaliate against the U.S. president’s plan to impose from Sept. 1 a 10% tariff on hitherto untaxed Chinese imports of $300 billion.
Bullion has gained 2.1% since the week began and hit $1,474.99 on Tuesday, its highest since May 2013.
Gold futures for December delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $7.70, or 0.5%, at $1,484.20. It surged to $1,486.75 earlier, its peak since Aug 2013. December gold has rallied since 1.8% since Friday’s settlement and is up 3.2% this month.
On the back of the U.S. labeling China a "currency manipulator" after the central bank allowed the yuan to fall below 7 to the dollar on Monday, the PBoC announced overnight a firmer-than-expected yuan fixing and issued a strongly-worded statement restating its commitment to keeping the currency stable "at an equilibrium and adaptive level" within the framework of its managed float regime.
Analysts voiced concern that the stabilization may not last long, however.
Mohamed El-Erian, chief economist at Allianz (DE:ALVG), said that the PBoC's action seemed to point to more of “a ceasefire at best, not a resolution."
Goldman Sachs (NYSE:GS) chief economist Jan Hatzius said that he no longer expects the U.S. and China to reach a trade deal ahead of the American presidential election in November 2020.
U.S. President Donald Trump’s decision to impose a 10% tariff on $300 billion of Chinese imports from Sept. 1 “suggests that both sides in the trade conflict are taking a harder line, reducing the odds of a resolution in the near term,” Hatzius wrote in a note.
He also said he now sees a 75% chance of a rate cut by the Fed in September followed by 50% odds of an additional cut in October, coming after a quarter-point reduction last week. Hatzius previously predicted that the Fed would only cut twice this year.
Market conviction is much higher with a 25 basis point reduction in September fully priced in with odds for an additional cut in October above 75%, according to Investing.com's Fed Rate Monitor Tool.
Lower interest rates reduce the opportunity cost of holding non-yielding bullion. For over $1 trillion of bonds now yielding negative interest rates, any further move downwards merely increases gold's relative attractiveness. German 10-year government hit a new record low of -0.54% earlier Tuesday, despite the stabilization in equity and foreign exchange markets.