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The Gold vs Japanese Yen Correlation

Dec 3rd, 2016

Background

The US$ gold price and the value of the Japanese Yen against the US$ has established a reasonably accurate correlation since the Global Financial Crisis in 2007. Consider the chart below.

goldvsyencorrelationsmall

This correlation provided a powerful advance warning of the low point reached in the gold price at $1045 in early Dec 2015, as well as the softening in the gold price which started in Jul 2016.

The pivotal question that needs an answer is whether gold bottomed in Dec 2015 or whether this is only to occur in Dec 2016, give or take a month or two.

Gold cycle theory

Gold cycle theory has it that the US$ price reaches a cycle low every 8 years on average coinciding with the US presidential election, and that Dec 2015 was a full year too early. However, because of the continued punitive destruction of the global financial system by central banks and especially the adoption of negative interest rates, along with all the other money value destroying mechanisms such as QE, etc., it was considered that perhaps it was entirely correct that the cycle low should occur earlier than 8 years. But because the softening in both the gold price and the Yen has been more severe and prolonged than it should have been, some market commentators now feel that the 8 year cycle will run its normal course and that true bottom will be reached in Dec 2016 / Jan 2017.

7yr8yrlowsmall

The Japanese Yen correlation

How is the Jap Yen to assist in answering this question of 7 year or 8 year cycle low? The Jap Yen has lost value against the US$ since Aug 2016 and in the process is now poised at the start of a strengthening phase because it has reached a:

  • Fibonacci retracement level of 61.8%, usually a powerful trigger;
  • cycle low which penetrated its 50Wema which it needs to do to continue its bull run;

yenretracementsmall

jyensmall

Consequence

In support of this Eisuke Sakikabara, dubbed Mr ‘Yen’, indicated the Yen will strengthen to 90 to the US$ (>20% increase) within 6 months of Donald Trump’s election. He is one of the most senior figures in Japanese finance, a former deputy in the Ministry of Finance, and legendary in his many correct Yen forecasts going back as far as the 1990s.┬áRead the Bloomberg article here.

https://www.bloomberg.com/news/articles/2016-11-10/mr-yen-says-trump-victory-doesn-t-change-currency-market-trend

The correlation therefore indicates that gold will track the Yen’s strengthening move of more than 20% within 6 months, and that whether gold true bottom was Dec 2015 or Dec 2016 becomes irrelevant as long as short term market gyrations and pain can be sustained. The real temporary threat is that if the gold price falls by the height of the head above the neckline of the head and shoulders pattern, then the price should fall to the previous low at $1045, or even lower to $1000, before it finds true bottom. This of course will have the very painful although temporary knock-on effect of further price plunges in the gold miners.

There are strong US$ headwinds against increases in the gold price at the moment and until these are curtailed the current status will prevail. The prospects for the Japanese Yen and the correlation between the gold price therefore adds substance to the prospect of a trend reversal soon.

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