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.
Continue reading at CNBC.com