* China bounce pushes world shares to six-month highs
* Investors set aside global feuds such as Iran sanctions (Updates prices, headline; adds comment, second byline, previous dateline LONDON)
By Renita D. Young and Maytaal Angel
CHICAGO/LONDON, Aug 7 (Reuters) - Gold climbed nearly 1 percent on Tuesday, having drifted near $1,200 an ounce this week, as the U.S. dollar fell versus China’s yuan against a backdrop of U.S.-China trade tensions.
“At the moment gold is more sensitive to the yuan than the dollar (index), so if the dollar is rallying but not against the yuan, gold is stable. The correlation (with the yuan) is almost one on one,” ABN Amro commodities strategist Georgette Boele said.
Chinese shares jumped the most in more than two years on investor hopes of fresh government spending and amid a pause in the trade tensions, while the dollar slid versus the yuan and a currency basket.
A weak dollar makes dollar-priced gold cheaper for non-U.S. investors.
“We should start bottoming out around $1,200 because we don’t expect a sell-off in the yuan from these levels. We think the authorities will (act to) stabilize it,” Boele said.
Spot gold gained 0.3 percent at $1,210.06 per ounce by 1:38 p.m. EDT (1738 GMT), while U.S. gold futures for December delivery settled up 60 cents, or 0.1 percent, at $1,218.30.
Investors could also be short-covering, said Bart Melek, head of commodity strategy at TD Securities.
“We’re not seeing a lot of gold long extensions. And because we’ve been quite short, you might be seeing some short-covering,” Melek said.
U.S. data recently showed investors added 13,931 contracts to their net short position in the week to July 31, bringing it to 41,087 contracts, the biggest since records became publicly available in 2006.
Global shares climbed amid the Chinese stocks rally and as European oil and mining stocks increased after the United States moved to reimpose sanctions on Iran.
Sanctions include precious metals, U.S. banknotes, steel and coal. Traders expect more Iran gold demand as investors seek to use bullion to operate globally, Melek said.
“We believe a reversal in gold prices is in the offing, as speculation of a trade war and Iranian sanctions are turning into reality. Further, record short investors positions in gold strengthen our conviction of a price recovery in H2,” ANZ analysts said in a note.
But Iran gold demand could be muted by a stronger greenback and the expectation that the U.S. Federal Reserve will increase interest rates, traders said. Higher rates make gold less attractive since it does not pay interest but costs to store.
Silver rose 0.7 percent at $15.37 an ounce. Platinum gained 0.6 percent at $825.74 per ounce, while palladium increased 0.3 percent at $906.55. (Reporting by Renita Young in New York and Maytaal Angel in London, Additional reporting by Apeksha Nair in Bengaluru; editing by Emelia Sithole-Matarise and Rosalba O’Brien)