Bloomberg News reported this morning that China May Limit Inflation With Reserve-Ratio Move Locking Up $140 Billion.

As I mentioned last night, Liquidity would be the reason that would take gold down with it. A liquidity crisis doesn’t spare any asset class.

More From Bloomberg:

Reserve requirements are being extended to customers’margin deposits, a move that may drain 900 billion yuan ($140 billion) from the banking system over six months, Bank of America Merrill Lynch economist Lu Ting said in an e-mailed note on Aug. 26. Mizuho Securities Asia Ltd. cited similar information. A central bank press official declined to comment.

China has already raised reserve ratios to a record 21.5 percent for the biggest banks to counter the fastest inflation since 2008. London-based Capital Economics Ltd. said that the reported move may mean no further increases this year, after previously anticipating another 1 percentage point gain by the end of December.

“It’s not surprising to see such a move from the Chinese government, as it is facing a big trade surplus and inflation pressure,” said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking group Ltd. “The move will further tighten liquidity,’” he said

….

The six largest Chinese banks need to start setting aside cash equal to as much as 21.5 percent of their margin deposits from Sept. 5, and complete reserves within three months, said Shen, citing information obtained from his investor contacts. Smaller banks will be given a requirement of 19.5 percent starting Sept. 15, with a five-month grace period, he said.

My initial lean would be that this is bearish for gold if the reserves are raised through selling of the metal to raise these reserves. Furthermore, if inflation is tamed then gold, seen as a hedge against inflation may suffer. The operative word is MAY because I felt that a correction in gold was overdue anyway. This might simply contributed to it.