Thursday, October 18, 2018

All of a sudden gold has not only disconnected from the Chinese Yuan, but it is also moving with and not against the dollar

For most real gold investors, understanding that the market runs via manipulation in the paper markets is a long held reality.  However 2018 has seen some interesting anomalies take shape which include the price of gold moving in lockstep with the Chinese currency.

Chart courtesy of Kitco

Yet with the sudden and recent moves upward by gold over the past week, which saw it break out of a long three month range and climb back above its 50 day moving average, an alternate dichotomy has also taken place as the gold price appears to not only have disconnected with the Chinese Yuan, but it is also moving with, rather than against, the U.S. dollar.
Yesterday, when looking at a chart of gold priced in yuan, a level which the PBOC appeared to be far more concerned about than the yuan-dollar exchange rate, we asked if the Chinese central bank had "lost control", because after managing to "peg" its currency at roughly 8,300 Yuan per oz of gold in Q3, something snapped this week when the PBOC appeared to lose its ability to managed the peg. 
Whether due to desperate liquidity needs elsewhere or defending stocks as they begin to freefall, the Yuan suddenly plunged back to 8,500 per oz of gold. 
Just 24 hours later, the topic of the Yuan gold peg "breach" prompted Nomura's Bilal Hafeez to observe that "Something is going on in CNY." 
As the Nomura strategist writes in an email to clients, even though the dollar has not moved much against the euro or yen today, "the Chinese yuan is falling to new lows against the dollar. Not only that, but the tight gold-CNY relationship I flagged last week appears to breaking down with CNY much weaker than it should be." - Zerohedge
Yuan - Gold peg breakout:

Dollar chart:

Gold chart:

While this divergence between gold and both currencies may simply be an anomaly, it does signal a serious warning for China who are now back to fighting a currency war directly against the dollar, rather than through the ability to use the gold markets as a buffer as was part and parcel for most of 2018.


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