Gold Makes Another Record Overnight

The forward market for the renminbi shot up last night, as a statement by PRC monetary authorities "'to proceed further with reform'" was interpreted as preparing for an upvaluation. The averages for both Shanghai and Hong Kong stocks were also up, by more than 2%. In Euroland, the European Central Bank called for a new agency to monitor national budgets and administer what were called "'quasi-automatic sanctions'." Explusion from the Eurozone was not one of them; instead, the ECB discussed more "'intrusive" monitoring of national government budgets, suspension of voting rights on Euro-wide decisions, and fines. This announcement has an effect on pulling the greenback up from its previous doldrums.

Gold got off to a running start in the first session of the week; it leapt up to the $1,260 level right after trading began. Pulling back to a little above $1,255 shortly after Hong Kong trading opened, the metal started to advance at 11 PM ET. The rally ended at 4 AM with gold touching a new record high of $1,266.30. A pullback lasting a little less than two hours brought the price back down to the high 1250s; it reversed at $1,255.80, and the metal ascended to above $1,260 again. As of 8:09, the spot price was $1,261.60 for a gain of $5.10 since Friday's close. The Kitco Gold Index attributed all of the gain to predominant buying.

The U.S. Dollar Index started off this week with a tumble down to 85.0. Recovering, it briefly leapt up above 85.6 on the yuan-revaluation news. That spike-up failing to hold, the Index slumped down to the 85.1 level before rallying again between 2 AM and 6:45. Again, it managed to pull up above 85.6. Slumping down to a much lesser degree, it bested 85.5 once more. As of 8:15 AM, it was at 85.55.

A Bloomberg report, as webbed by Business Week, says gold increased along with other commodities on anticipation that a strengthening renminbi will increase demand from mainland China. If upvalued, a renminbi will go farther when buying commodities.

“The impact on China in the short term will be neutral for gold prices,” Wallace Ng, executive director with Fortis Nederland NV in Hong Kong, said in an interview with Bloomberg Television. A stronger yuan will benefit gold prices in the longer term because it will increase the purchasing power of Chinese investors, he said.

The article also notes that the central banks of Russia, Saudi Arabia and the Philippines increased their holdings; that's prompted speculation of further Asian and Middle Eastern central bank buying. The SPDR Gold Shares Trust's holdings were unchanged on Friday.

A Wall Street Journal article ascribes gold's latest record to softening in the greenback, with the upvaluation providing little boost at this time.

VTB Capital analyst Andrey Kryuchenkov said China's decision to drop its nearly two-year-old peg to the dollar, and gradually strengthen the yuan, could prove positive for gold demand, but noted there is still a lot of uncertainty around the rate of appreciation China—a net gold importer—will allow. Many commentators are suggesting the announcement is more of a political gesture ahead of the June 26-27 Group of 20 summit in Toronto than a signal of any big changes in policy.

"Sentiment is positive this morning following through from that announcement, but the problem is that we don't know yet exactly what will happen," Mr. Kryuchenkov said.

Another analyst quoted was more optimistic about the news, arguing that a weaker greenback will add to inflationary pressure.

Renewed strength in the greenback, which pushed the U.S. Dollar Index up to 85.75, added to downward pressure that pushed gold down to the $1,255 level again. Regular trading opening added to a decline that got gold from $1,263 to $1,257. A brief recovery rally prefaced the metal falling further. As of 8:53 AM, the spot price was $1,256.20 for a loss of $0.30 on the day. The Kitco Gold Index attributed +$1.15 to predominant buying and -$1.45 to a strengthening greenback. After that run-up above 85.75, the U.S. Dollar Index slid back somewhat. As of 8:55 AM, it was at 85.62.

Another record was made, but the metal's trading action has been choppy since. It's too early to say whether there'll be more softening later, but the clime doesn't look very favorable for another run at another record.