What gold price is possibly telling us about Chinese Yuan6 November, 2012, 2:40. Posted by Zarathustra
Last year, we made the observation that for the past few years, if gold price topped out, Chinese Yuan would then topped out in months to follow. Likewise, if gold prices break higher, Chinese Yuan then follow. Earlier, we also found that gold price seems to be somewhat more closely related to the change of the size of PBOC’s balance sheet than the Fed’s balance sheet, which is interesting.
The chart below shows an updated look of the observation, which we have not updated for quite a while. The top in gold last summer preceded the subsequent peak in Chinese Yuan against US dollar. Similarly, the pre-financial crisis top in gold price also preceded the start of the period when Chinese Yuan did nothing. Perhaps even more interestingly, gold price bottomed out earlier this year, which preceded the recent strength of the Chinese Yuan.
We will leave you decide whether gold has (once again) topped out. But if it has, it probably foretells that the current strength in Chinese Yuan will be over in months, if not weeks. And since the strength of Chinese Yuan partly reflects how confident the market and the government are on the Chinese economy, we could speculate that the “recovery” in the Chinese economy will be short-lived.
Such speculation, of course, will not turn out be true if gold is not really topping out and that our weird hypothesis about gold is totally wrong.