China made its long awaited restatement of its official gold reserves, and it was widely received as a ‘lowball number.' China was under some pressure from official central bankdom to update its numbers, the last time being in 2009.  And since they are trying to play nice, and have their yuan including in the SDR basket of currencies, they had to say something. I am not sure how to take it except with some serious skepticism.

I include two new charts below that compare the performance of gold against the euro/dollar cross and the inverse of the dollar DX index. Clearly at this point gold is running inversely against the strong dollar and with the weaker euro.

This situation in the markets has ‘extreme' and ‘fragile' written all over it. I am not quite sure if we are at the 2007 level yet, but we are closer to that than we are to any sustainable economic recovery by a long shot.

The ratio of paper claims to physical gold continues to creep higher at over 97:1 as shown below. Rather than allow the price to rise to make more physical gold available the bullion banks keep selling their paper gold, raising and reraising the stakes to shake out the gold longs ahead of the throw down for August expiration on July 28th and more importantly the active months of August and December. If you were fearless about losses, you might choose to play their brand of poker the same way.

I hesitate to call any of this ‘capitulation' because it is becoming such an obviously artificial situation. But I suppose at some point someone or something has to stop this, as the collapse of the Bear Stearns hedge funds led to the demise of Lehman, and the collapse of the paper credit bubble in 2007-2008.

I suspect that the paper bubble in precious metals will have quite a bit of company this next time around, especially in a narrow group of grossly overpriced stocks and distressed debt.