Key trend changes in the yen have a close correlation with major moves in the price of gold Both yen and gold are at another major inflection point Diverging monetary policy between the Fed and BOJ suggest next move is to the downside Background: Moves in the Japanese yen have been a reliable indicator for gold due to the effects of the yen carry trade. Given ultra-low interest rates in Japan, its currency has been the funding currency for global speculators who borrow in cheap yen and then speculate in other assets. When the yen weakens, there is greater borrowing of the currency to chase financial assets all over the globe. This pushes financial assets higher and reduces overall market volatility, which decreases the allure for gold as a safe haven asset. A weak yen relative to a stronger dollar is also negative for gold since a stronger dollar is typically associated with lower overall inflation rates. Thus, when the Bank of Japan (BOJ) decided to embark on a massive money printing program in 2012 to end deflation in Japan, that effectively marked the end for the bull run in gold.
In this chart and those that follow, I show the yen inverted (in red) next to gold (in black) to illustrate the relationship over the key timeframes discussed. Here is the price of yen and gold from 2007-2012:
This post was published at FinancialSense on 10/06/2017.