Chinese reserve ratio hike a key factor in gold slide

China's decision to increase its reserve requirement ratio by 0.5 percentage points overnight has been a major catalyst in Comex gold's two-percent drop on Friday.

Gold futures in New York were recently trading down $31.30 at $1,355.70 per ounce, which is near the day's lows.

China has become increasingly concerned about inflation, which stands at about 5.1 percent. This marks the seventh time the government has raised its reserve requirements in the past 12 months.

This type of action puts downward pressure on gold - the yellow metal is often seen as a hedge against inflation.

"That announcement started a sell-off in the commodity markets overnight. Also, we have a long weekend ahead of us so we're getting some profit taking and general lightening of commodity positions," Sterling Smith, an analyst at Country Hedging, said.

The gold market was already softened up by successful multi-billion-euro bond auctions by Portugal, Spain and Italy, he added, each of which were completed at interest rates below market expectations.

Also, US Federal Reserve chief Ben Bernanke said on Thursday that US GDP growth of 3-4 percent for 2011 "seems reasonable".

Back when the Fed rolled out its $600 billion quantitative easing (QE2) programme in November, it was anticipating growth in a range of 3-3.6 percent

"There might be some hangover as [those news items] built a little bit of risk premium into the market but today's sell-off was really started with China," Smith said.

"We came into the day with a black eye and they're just finishing Rocky Balboa now. That's just the nature of these markets. When they start to sell-off, buyers tend to go into hiding pretty fast, especially with a three-day weekend ahead," said Smith, who added that Friday's losses were probably a "one-day wonder".

US markets are closed on Monday for Martin Luther King, Jr Day and will reopen on Tuesday.

From a technical standpoint, $1,352 will prove to be a key area. "As long as the market can hold that, I don't see any real problems. But if we do break lower, the we could go down to around $1,325," Smith said.

Also taking a sizeable hit was Comex silver, which was down $1.048 at $28.215 per ounce for March delivery.

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