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The dragons challenge

September 2015

China doesn’t want to reveal its gold reserve. But it wants to create new challenge against the dollar and compel gold prices to slip further. By Dharmesh Bhatia, Manager – Commodities Market, Emirates NBD Securities

Believing that the investment made in gold is no more profitable now, investors have started adopting short position in this commodity. A decade long rally which completed in 2011 now won’t be witnessed. The US Federal Open Market committee (FOMC) believes that favorable situation has been created to increase interest rate during the current year. Such statement was made by Jennet Yellen, the chairperson of the US Fed during her testimony before the senate. The market made such conclusion from this testimony that increase in the interest rate is likely by September. From now on words, USD would become stronger against all the global currencies. So, gold prices would decline further in dollar terms.

Gold continues to suffer in dollar terms. This store-of-value bid from non-dollar investors makes sense when you see pretty much every central bank outside the U.S. Fed trying to devalue its currency. Apart from increase in the interest rate, several other causes would be visible in coming days for the dollar becoming further strong. The People’s Bank of China recently published figures on its gold reserves for the first time since 2009 and thus posed new challenges to the USD in the currency market. China released these figures when gold touched the new bottom of $1076 since 1st April, 2010.

Now, China has become important to include its currency Yuan as reserve currency in the special drawing rights (SDR) currency basket of the IMF (International Monetary Fund). It is merely 1.65% increase of gold in the Forex reserve. According to them China’s gold reserve must be over 3000 ton.

China has started a fresh its economic reforms, so it could convince the IMF to include Yuan in the global reserve currency basket. Its main intention is to challenge the global supremacy of the USD. China wants to convey such message to global investors that Yuan is as strong as the USD. The IMF has already started contemplation to include Yuan in the currency reserve basket since October and for that China has also already started ground work.

By showing less reserve of gold, China would come in the market to buy gold at lower prices to add in its reserve. Sources opine that no one would be surprised even if China purchases average of 100 ton gold every month. They say that gold is now at the ‘Technical Tipping (sloping) point.’ The critical support is at $1040 Gold has gone below the daily moving average (DMA) of 50 and 200 days. Given this, gold prices are likely to slip below $900.

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