Yuan vs Dollar: Gold as collateral damage?

China wants to challenge greenback - but it would dent metal further.

Believing that the investment made in gold is no more profitable now, investors have started adopting a short position in this commodity.
A decade-long rally that was completed in 2011 now won't be witnessed. The US Federal Open Market Committee believes that a favourable situation has been created to increase interest rates during the current year. Such statements are coming from the US Federal Reserve on a regular basis. The market made such conclusions from this testimony that an increase in interests rate is likely by December. Thus, on words, the US dollar would become stronger against all 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 Fed trying to devalue its currency. Apart from an increase in the interest rate, several other causes would be visible in the coming days for the dollar to further strengthen.
The People's Bank of China published figures on its gold reserves for the first time since 2009, and thus posed new challenges to the dollar in the currency market. China released these figures when gold touched the lows and is currently trading near the psychological level of $1,000 since April 1, 2010.
Now, China has become important to include its currency, the yuan, as reserve currency in the International Monetary' Fund's Special Drawing Rights currency basket. According to a market poll, China's gold reserves must be over 3,000 tonnes. But it wants to create a new challenge against the dollar and compel gold prices to slip further.
China has started fresh economic reforms, so it could convince the IMF to include the yuan in the global reserve currency basket. Its main intention is to challenge the global supremacy of the dollar. China wants to convey a message to global investors that the yuan is as strong as the dollar. The IMF has already started contemplation to include the yuan in the currency reserve basket since October, and for that China has also already started ground work.
By showing less reserves of gold, it is possible that China can come in the market to buy gold at lower prices to add to its reserve. Gold is now at the technical tipping sloping point; the critical support of $1,140 has already broken. Gold has gone below the daily moving average of 100 and 200 days. Given this, gold prices can likely to slip further below $1,000.
The writer is the manager for commodities market at Emirates NBD Securities. Views expressed are his own and do not reflect the newspaper's policy.