August 12, 2015 / 3:05 AM / 2 years ago

Gold hits three-week top on lower dollar, shares after China devaluation

A sales woman displays a gold bracelets as she poses for pictures at a jewellery shop in Lin'an, Zhejiang province, China, July 29, 2015.China Daily/Files

LONDON (Reuters) - 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 2 percent 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 3 percent from a 5-1/2-year low of $1,077 during a late-July rout.

Spot gold rose as much as 1 percent to its highest since July 20 at $1,119.80 an ounce in earlier trade and was up 0.8 percent at $1,117.76 by 0920 GMT.

U.S. gold for December delivery gained 0.9 percent to $1,117.50 an ounce.

Gold was lifted by a weaker dollar, down 0.9 percent against a basket of currencies, and lower U.S. Treasury yields on doubts over whether the U.S. Federal Reserve will raise interest rates in the wake of China's devaluation.

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

"Although 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.

Additional reporting by Manolo Serapio Jr in Manila; Editing by Dale Hudson

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