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Gold Prices Fall on China Yuan News

Stocks in this article: AEM EGO

NEW YORK ( TheStreet ) -- Gold prices nose-dived double digits Monday after China's announcement that the yuan would rise in value improved risk appetite and prompted investors to dump gold and buy stocks.

Gold for August delivery settled down $17.60 to $1,240.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Monday has traded as high as $1,266.50 and as low as $1,233.60. The U.S. dollar index was adding 0.23% to $85.90 while the euro was falling 0.45% to $1.23 against the dollar. The spot gold price Monday was down more than $20, according to Kitco's gold index.

Risk appetite improved Monday as investors cheered a stronger yuan and traders were selling gold and using the profits to buy stocks. "Profit taking in gold was apparent," says George Gero, vice president of global futures at RBC Capital Markets. "Gold open interest on Comex now shows lot of newcomers who may be weak short term holders and second thoughts prompted sell stops."

However, many analysts believe a stronger yuan is good news for gold prices over the long-term as the move will improve China's purchasing power. The yuan was rising 0.45% against the dollar and the currency could appreciate by 3% this year, a slow and steady climb. Some analysts argue that the yuan is undervalued by as much as 40%.

Gold is a dollar-denominated asset and typically trades inversely to the U.S. currency. As the U.S. dollar slips, gold becomes cheaper to buy in other currencies and gold prices rise. When China first let the yuan appreciate almost 20% between 2005 and 2008, gold prices touched $1,000 an ounce for the first time.

History shows that other currency appreciation scenarios have yielded stronger gold demand. "If you follow the Indian market like I do whenever the rupee appreciates Indian gold demand accelerates because obviously it's cheaper ... The Chinese government itself has been encouraging the citizenry to buy gold and silver and if the yuan rises I suspect that will facilitate the buying of more gold and silver," said John Embry, chief investment strategist of Sprott Asset Management.

How To Buy Gold Futures

Gold demand in China has steadily strengthened since 1992 accounting for 11% of global gold demand in 2009. The World Gold Council sees demand doubling in the next 10 years from $14 billion to $29 billion and analysts think a stronger yuan could be a catalyst.

Juan Carlos Artigas, investment research manager at the World Gold Council, says that "holding other things constant, if the yuan appreciates against the dollar, gold becomes more attractive for the Chinese consumer as the price of gold in RMB terms falls."

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