Having reached its weekly gain last week after increasing quickly due to trade escalation between the US and China as well as worries on global economic outlook, gold prices increased on Monday. As the US accused China of being a currency manipulator and said it would engage the IMF to eliminate unfair trade trade advantage last week, the IMF said China’s yuan was largely in line with economic fundamentals but added worsening trade tensions between the US and China could pose risk to China’s economic and financial stability. China central bank’s former governor Zhou Xiaochuan said if emerging economies were to devalue their currencies to gain trade advantage amid ongoing trade war, this would lead to a global financial chaos. In the meantime, Chinese yuan is expected to continue losing its value after China allowed its currency to fall below 7 against US dollar last week while how effective the measures taken to prohibit capital outflow remains uncertain.
After reaching $1,511 last week and gaining 6% so far this month following investors rushing into safe havens due to global growth worries and escalating trade tensions, gold prices increased on Monday and kept its upside momentum amid ongoing trade dispute, lower yields and slowing global economy.
As of 14:06 GMT+3, spot gold was trading at $1,504.08 an ounce while dollar index was down to 97.49 after increasing up to 97.73 earlier. US 10-year Treasury yield decreased to 1.688.
ANZ analyst Daniel Hynes said on Reuters that a resolution in trade war was one risk for increasing gold prices but possibility for resolution diminished as US President Donald Trump said last Friday that trade talks in September could be cancelled.
After the US accused China of being a currency manipulator and said it would engage the IMF to eliminate unfair trade advantage created by China’s recent actions, the IMF said China’s yuan was largely in line with economic fundamentals however added worsening trade tensions between the US and China would pose risks to China’s economic and financial stability. IMF China Department’s director James Daniel said 10% tariff the US about to impose in September would cause 0.3% fall in China’s growth in the following 12 months while adding this would go up to 0.8% if the US were to increase tariffs to 25%.
China central bank’s former governor Zhou Xiaochuan said last weekend that ongoing trade war would lead to new discussions regarding the consensus that had been made to prevent “competitive devaluations” as it could lead emerging economies to devalue their currencies to gain trade advantage which would cause global financial chaos. Zhou also said expansionary policies were positive but would not be so supportive to importers and exporters that were affected directly by US tariffs. Data released last week had showed China’s exports increased well above expectations and imports contracted less than expected however this is not expected to sustain as it happened due to importers and exporters bringing forward their operations to avoid additional tariff due on September 1.
In the meantime, China’s yuan is expected to continue losing its value after China allowed yuan to decrease below 7 against US dollar last week. In a similar devaluation, official record showed $512.7 billion capital outflow in 2015. Chinese government have taken restrictive measures to prevent similar thing to happen again ever since 2015 and many individuals and corporations were punished for illegally transferring their capitals to offshore accounts, however it is stated that those measures might not be as effective as anticipated in order to prevent similar capital outflow if China’s yuan was to lose its value further. Thus, how further China can allow its currency to devalue against US dollar will be determined by how much China counts on its restrictive measures against capital outflow. Bank of America Merrill Lynch forecasts yuan to decrease to 7.3 against US dollar at the end of the year. Today, yuan was down as low as 7.0706.