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Gold spiked to within two dollars of $900/oz in holiday leaden Asian trading as saber rattling between US and Chinese officials regarding the manipulation of the yuan ratcheted the tension in global capital markets. Last week Treasury Secretary-designate Timothy Geithner stated that China was a currency manipulator sending shock waves through the financial markets as the Obama administration appears to have taken a much more confrontational stance with Chinese authorities than its predecessor.

   

Over the week-end Su Ning, vice governor of the People's Bank of China, shot back that Mr. Geithner’s remarks were misleading and warned that, ”We should avoid any excuse that might lead to the revitalization of trade protectionism. Because it will do no good to the fight against the crisis, nor will it help the healthy and stable development of the global economy."  

Last week our colleague Kathy Lien noted that Mr. Geithner  made a rookie mistake, writing,  “To force China to appreciate its currency means less demand for US Treasuries and US dollars and unfortunately that is not something the US can afford right now when the government needs to spend its way out of recession.”

This escalation in tension between the two giant economies has translated into a strong rally in gold& nbsp; as traders now fear that the safe haven status of the dollar may be compromised by China’s  unwillingness to provide further financing for US deficit spending and may result in a sharp spike in inflation as US tries to monetize its debt. The EUR/USD has been the primary beneficiary of the this shift in sentiment rising more than 100 points off the session lows, but should the rally in gold continue the Aussie could see appreciation as well,  rekindling the currency’s strong correlation with the price of gold.      

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.