International Gold: China Lowers the Reserve Requirement

china gold, international gold, gold coins
Written by Mike Hammer

This weekend China lowered the reserve ratio requirement for “some” banks, causing gold to go into a tailspin. It’s a bit of a complicated logic trail. But, let’s try to understand it. When a bank’s reserve ratio goes down, it means it can lend more money for every “hard asset” it holds. Hard assets are things like currency, balances at central banks, and — you guessed it — gold, silver and such.

The reserve ratio tells how much these hard assets are leveraged – if a bank needs to have 5% in “hard assets” it can loan out every dollar it holds 19 times. Because 100 (percent) divided by 5 (percent) equals 20, and 20 minus 1 equals 19. See, banking math isn’t hard, it’s just that the concepts can be confusing. Math is “just how we keep track”. At least, that’s what the accountants say.

In any case, this is the FOURTH time China has done this in the past year, wow. Estimates are that China’s actions will result in more 750 billion more Chinese yuan coming into the market, driving down it’s value. That increases the (relative) value of the US Dollar, which is what we’re seeing this morning. And as we know, USD going up means gold going down – in the short term. There you have it. So not a good day for gold bulls, who have to wait a while longer for gold to go up. You can read more about China’s action here.

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About the author

Mike Hammer

Mike Hammer has had a wide-ranging career, with trading and investing as a continuing theme. Mike graduated with a business degree, then worked with Macy's. After Macy's he spent a summer trading his own account, which taught him a lot about trading in general and markets in particular. Trading through the Black Monday and the Crash of 1987 showed him how most people are unprepared for upheavals in their trading. He then joined a well-known financial planning firm as a financial advisor, helping regular people understand their finances and meet their life goals.

Then came the usual story - Mike met and married the lady of his dreams. They moved to upstate New York, where he worked first for a small manufacturing consulting company, then a major university. While loving the work and the higher-education atmosphere, Mike missed the world of finance. Eventually, he signed up for stock trading coaching with the Adam Mesh Trading Group, to learn from people who understood modern markets. Within a year, Adam asked Mike to become a stock trading coach.

Since then, Mike has trained over 200 individuals, spoken at several national conventions, and is a frequent contributor to conference calls across the Adam Mesh community. Mike writes The Gold Enthusiast daily newsletter, runs the Golden Hammer trading service, and participates in the Mesh Private Portfolio. He also keeps a position in international education which keep him in touch with "the student mindset". Mike closely follows the gold, energy, and financial sectors. His motto is "Plan your trade, then trade your plan!"

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