By Barani Krishnan
Investing.com - Gold bugs had counted on the recent U.S. interest rate cut, but it’s China’s currency devaluation that’s providing a windfall now to longs in the yellow metal.
Both bullion and futures of gold hit six-year highs on Monday as the tit-for-tat action between China and the U.S. in their growing trade war led to spiraling safe-haven demand.
Spot gold, reflective of trades in bullion, traded at $1,465.24 per ounce by 2:18 PM ET (18:18 GMT), up $24.25, or 1.7%, 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 new tariffs.
Beijing added to the blow of the devaluation by ordering state-owned companies to suspend imports of U.S. agricultural products.
Spot gold earlier rose to $1,469.74, its highest level since May 2013.
Gold futures for December delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $19, or 1.3%, at $1,476.50. It surged to $1,481.75 earlier, a peak not seen since Sept 2013.
Gold caught a strong safe haven bid as risk aversion hit other markets, with money tumbling out of stocks and into bonds, as well as gold. The S&P 500, Dow and Nasdaq Composite all sank more than 3%.
The yield on the benchmark 10-Year Treasury yield plunged about 6.1% to 1.741%, further pressued by an unexpected drop in the Insutitue for Supply Management's services PMI this morning. Non-yielding gold becomes more attractive to investors as bond yields fall.
Gold prices initially hit 2-week lows on Thursday disappointment over what was deemed an inadequate U.S. rate cut. Analysts had expected the Federal Reserve to announced a series of rate cuts to shield the U.S. economy from slowdown. But the central bank announced just a 25-basis-point cut for now and and did not indicate more to come.
But shortly after Thursday’s official close, gold staged a dramatic rebound in post-settlement trade that continued into Friday as Trump tweeted his plan to hit China with additional tariffs.
“As a result of the escalation in U.S.-China trade spat and weakness in U.S. data, calls for another 25-basis-point (Fed) rate cut have increased further,” noted Fawad Razqzada, analyst at FOREX.com in London.
Razaqzada said the S&P had also broken below its bullish trend line, further feeding the risk off frenzy and rush into gold.
“As things stand therefore, the path of least resistance in stocks is now to the downside and will remain that way until and unless we see a clear bullish reversal pattern emerge,” he said.
Viraj Patel, global macro strategist at Arkera, said that the U.S. would actually lose in the event of an all-out currency war as Beijing is “far more advanced in playing the currency game and has bigger firepower”.
But Patel indicated that safe havens such as gold or the Japanese yen woyuld be the big winners in any active global FX war.