The red cloth is part of the kidnapping quest. Maybe you don't remember, but you got it from the guy in the Graveyard who was buried alive (Tirdis). Just walk around the bridge district and if you see someone completely dressed in red, he's your man! I'm not going to spoil you any further, just talk to him.
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Melusine, Archbabe of the OHF
Your voice is ambrosia