Gold hits 3-week high on lower dollar, shares after yuan devaluation

Gold rose for a fifth session in a row on Wednesday, hitting a fresh three-week high, as the dollar and European equities slid on concerns over China's devaluation of its currency.

Earlier in the day, the People's Bank of China set the yuan's midpoint reference rate weaker than Tuesday's surprise two per cent devaluation. The move sparked fears of a currency war and hit global equities, prompting some investors to seek assets perceived as safer such as gold. The metal has now recovered more than three per cent from a 5-1/2-year low of $1,077 during a late-July rout.

Spot gold rose as much as one per cent to its highest since July 20 at $1,119.80 an ounce in earlier trade and was up 0.8 per cent at $1,117.76 by 0920 GMT. US gold for December delivery gained 0.9 per cent to $1,117.50 an ounce. Gold was lifted by a weaker dollar, down 0.9 per cent against a basket of currencies, and lower US Treasury yields on doubts over whether the US Federal Reserve will raise interest rates in the wake of China's devaluation.

A weaker US currency makes dollar-denominated gold cheaper for foreign buyers, while the fall in returns from US bonds is seen as positive for the metal, which pays no interest.

"Though Fed policymakers are looking at what's happening in China and other economies, they are likely to stick by a September rate hike, as they indicated after the Chinese stocks turmoil in July," Natixis analyst Bernard Dahdah said.

"The support we are seeing in gold could therefore be short-lived."

China's devaluation is unlikely to distract the Fed from a domestic economy that appears increasingly ready for higher interest rates, economists and Fed watchers said.

But if China's action indeed spurs a currency war, other currencies would depreciate while dollar strength continued, analysts said, which would eventually weaken gold.

The weaker yuan would make it more expensive for China, the world's top consumer, to import gold, potentially extending weak Chinese demand seen since 2014, said OCBC Bank analyst Barnabas Gan.

Spot silver rose 0.2 percent to $15.30 an ounce after hitting a one-month high on Tuesday. Platinum gained 0.6 percent to $987.75 an ounce, having touched a three-week top overnight and palladium was up 0.4 percent at $604.