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Gold Gains Safe Haven Status Thanks to China

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Gold Gains Safe Haven Status Thanks to China

Aug 13 2015, 11.03am GMT


Gold once again proved its resilience as it ended markedly higher on Wednesday to register its fifth gain in as many days in the face of the turmoil in China which unsettled markets for the second day in succession.

The unexpected devaluation of the yuan on Tuesday, followed by a further devaluation on Wednesday and subsequent Chinese government intervention in the market to slow the rate of decline in the value of the currency, have increased concerns about the state of the second biggest economy in the world. 

Throughout history, financial turmoil and uncertainty has continually seen investors falling back on gold as a safe haven at the expense of other forms of investment such as stocks, with gold regularly viewed as the safer bet.

Despite all the market uncertainty and turmoil unleashed by the yuan devaluation, gold futures have picked up almost $30 per ounce since Friday when the yellow metal closed at $1,094.10 per ounce. Gold futures for December delivery (GCZ5, -0.50%) meanwhile settled at $1,123.00 per ounce on Wednesday.

Demand for gold increased from China as speculators saw an opportunity to profit from the falling yuan which meant the price of gold in the Chinese currency would increase twofold as the gold price increased and the yuan dropped in value. The other aspect increasing the demand for the precious metal from China came from investors seeing it as a safe haven during the period of uncertainty caused by the currency volatility.

The devaluation of the yuan could also lower the appetite for an increase in the interest rate amongst officials at the U.S. Federal Reserve which reduces the potential for the U.S. dollar (USD) to strengthen further, and to the contrary, might actually depress dollar values.

A lower dollar would be another factor pushing gold higher as the metal becomes cheaper in local currencies which would then result in an increased demand.

FXTM market analyst Jameel Ahmad said in a research note on Wednesday that, “Gold has benefitted most from the situation in China because the metal looks set to continue building on the strongest rally seen in months. Everyone will now be waiting for any clues from the Federal Reserve on how this move might impact their [intentions] to begin raising U.S. interest rates and if it does, there is inspiration for the gold bulls to continue recovering what have been stunning losses over the previous couple of months.”

U.S. retail sales data for July, due to be released on Thursday, will determine gold’s short term direction, according to Chintan Karnani, chief market analyst at Insignia Consultants. He added in a note written on Tuesday that, “in case gold rises after the release of U.S. retail sales numbers, $1,220 and $1,292 [an ounce] become the targets.”

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