There’s a lot of talk about the Yuan price of gold falling out of a price suppression channel.  Both Zerohedge and Nomura have weighed in on this.

The Yuan price of gold surged overnight to above CNY 8500 per ounce which is a major breakdown.  But it’s also indicative of something that has long been suspected during this gold bear market.

China doesn’t want the price of gold to rise.  Those accumulating gold — China and Russia — have zero incentive to accumulate at higher prices.   And the gold chart of the last three years bears out that they have had to come in at higher prices on pullbacks because market bottoms keep coming in higher and higher.

The 2015 low was around $1050.  2016 at $1146.  2017 the low after a pullback in July couldn’t breach $1208 during a strong post-U.S. election rally.  This year the price was briefly pushed below $1200 in the longest downtrend of the seven year bear market but has since popped back over $1230 with its sights now set on  $1250.

China may have no choice here but to let the price of gold rise.  Because conditions in other markets are changing rapidly.  So, ultimately, what China wants really may not matter anymore.

Remember, the eurodollar markets broke in late May this year as Jeffrey Snider at Alhambra Partners reminds us daily.

The PBoC cut the reserve ratio again recently to free up liquidity in Chinese banks but it doesn’t seem to have stemmed the tide.  And that’s why it has continually loosened the Yuan fix rate, now approaching 7 vs. the U.S. dollar.

Offshore dollar markets are the pool of real savings in the global economy and it determines where we are headed.  And the offshore dollar hoarders are pulling out of China… and Europe… and Japan…. and South America.

You get my point.

Looking at gold today then, the dollar is rising versus not only the Yuan thanks to the PBoC’s lower fix but also versus the euro, which has now decidedly brushed up against resistance at $1.16, saw its own shadow of Italian political crisis and ran screaming.

euro october.png
Major support at $1.155 is now Resistance

So here we have another example of the euro puking and gold rising.  This is the third time in just over a week.

gold octover

Gold is not supposed to be up while the euro and yuan are down.  What this is telling us is that the short-term dollar liquidity selling pressure gold always goes through during the early stages of an emerging crisis is coming to an end.

And what comes now is the fear part of the crisis.  Retail investors are falling out of love with hedge-fund hotels like Facebook (NYSE:FB), Tesla Motors (NASDAQ:TSLA) and, today’s whipping boy, Netflix (NASDAQ:NFLX).

They are looking around at the craziness and buying some gold down here because it looks cheap (which it is) but not in the gutter either.  The recent failure of gold to break down below the 2016 low is giving bulls moxie.

Add to that institutional money is scared to death of the Democrats winning something on November 6th and we have some very choppy equity markets.

I expect a rally in the Dow and the S&P 500 after the Republicans hold the House and the Senate as that pressure fades.  But, the bigger concern for Dow bears at this point should be the ratcheting up of rhetoric between Italy’s leadership and the EU’s over Italy’s budget.

That is putting downward pressure on the euro while the ECB tries to scare the Italians into knuckling under with rising interest rates by not stepping in to buy Italian debt.  The middle of the Italian yield curve has gotten awfully bumpy this week.

italy debt curve

That hump showed up last week and has persisted into this week.  For now the market doesn’t want to believe that Italy will lose its fight with the Troika — The ECB, the IMF and the EU — but with Deputy Prime Minister Matteo Salvini entertaining a run for Jean-Claude Juncker’s position as President of the European Parliament, that illusion may well shatter soon.

For now, the markets are caught between the rock of the Democrats’ Resistance to Trump and the hard place of Italian budget talks and the hope that Theresa May will cave to EU demands in Brexit talks.

But, once that worry lifts, like the U.S. equity markets, the European debt markets will let loose as clarity over the U.S.’s political future between now and the 2020 election will make the choice for smart money a whole lot easier.

And as I’ve pointed out in the past, German Chancellor Angela Merkel is on her last legs in Germany, despite the non-committal results of the Bavarian election.  For now, her troubles will be kept out of the headlines while the German political establishment tries to figure out how to maintain control.

But, this is yet another catalyst for gold in the short to medium term along with the worries over China’s shadow banking system melting down.

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