China rate surprise knocks 2 pct off gold

By Frank Tang

NEW YORK (BestGrowthStock) – Gold fell as much as 2.7 percent on Tuesday, set for its largest one-day fall since early July, as the dollar surged after China unexpectedly raised interest rates and the United States said it will not devaluate the dollar.

After steadily rallying by nearly 20 percent since mid-July to a record near $1,400 last week, analysts said bullion was primed for a correlation and could be posed for more losses after breaking below the bottom of its three-month rising channel and a bearish cross-over in the MACD technical charts.

“We have been due for a correction in the gold and some other commodity markets, and China’s rate hike and Geithner’s statement provided the vehicle for the heavy selling in commodities and currencies across the board,” said Bill O’Neill, partner at commodities firm LOGIC Advisors. Read More About China’s Foreign Investment.

Prices dived in heavy trading volume after China surprised markets with its first rate hike since 2007. Fearing more aggressive monetary tightening in the world’s fastest-growing major economy, investors cut risk exposure by selling equities and commodities to and buying the U.S. dollar.

Adding to the dollar index (Read more about the global trade. )’s percent 1.4 surge, its biggest in more than a month, Geithner said on Monday the United States would not devalue the dollar for export advantage.

Spot gold fell 2.1 percent to $1,340.05 an ounce at 1:06 p.m. EDT (1706 GMT). U.S. gold futures for December delivery fell $31.20 an ounce to $1,340.90.

Silver, which outperformed gold during the latest three-month leg of the rally, dropped 2.2 percent to $23.82 an ounce against $24.35, on course for its largest one-day fall for a week, while the platinum group metals were more insulated against the broad declines in the commodities sector.

China’s decision to raise its benchmark one-year interest rate put perceived risk currencies including the euro and the Australian dollar under pressure, while knocking the commodities complex.

“Clearly it is the move in the dollar that’s having probably the biggest near-term impact on the commodities complex and most notably the precious metals,” said RBS strategist Daniel Major.

“The prospect of higher rates in China or elsewhere clearly has got longer term implications as gold can’t compete once yields do return to more traditional (levels),” Major said.


Gold, which is denominated in dollars, tends to move in the opposite direction to the U.S. currency. The correlation between bullion and the U.S. currency has increased to a negative 0.76, its strongest inverse relationship in 10 months, Reuters data showed.

On an hourly basis, the gold/dollar inverse correlation has largely strengthened throughout Tuesday as the sell-off in gold was accelerating.

Matthew Turner, an analyst at Mitsubishi Corp said China’s rate hike could point to a stronger yuan over the medium term, which will reduce the need for the dollar to fall against other currencies.

“Anything that alters the perceptions of where the dollar and global monetary policy is headed is significant for gold at the moment,” Turner said.

Gold priced in euros and sterling also fell after China’s policy decision, by 1.1 percent and 0.9 percent, respectively.

Spot gold prices hit record highs at $1,387.10 an ounce last Thursday, driven by concern over the stability of the currency markets and by expectations for further U.S. quantitative easing which could undermine the dollar.

While they have since corrected, the metal could receive a boost as investors looked ahead to further monetary easing at a meeting of the Federal Open Market Committee next month.

Credit Agricole analyst Robin Bhar said the FOMC and the upcoming G20 meeting are potentially friendly toward gold and could push the dollar lower.

Platinum fell 1.1 percent to $1,672.50, and palladium was trading down 1.1 percent at $577.00.

Swiss bank UBS identified palladium on Tuesday as one of its top picks among commodities.

The metal has been one of the best-performing precious metals this year, rising 44 percent.

(Additional reporting by Jan Harvey and Amanda Cooper in London; editing by Sofina Mirza-Reid)

China rate surprise knocks 2 pct off gold