Gold And Yen At Key Inflection Points; Watch For Possible Breakdown

Tokyo (Oct 7)   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.

With the increase in financial stress in global financial markets caused by the selloff in oil from 2014 to 2016, coupled with the Chinese currency devaluation in the middle of 2015 and early 2016, financial risk globally picked up and, with it, came the bottom in the yen currency and gold. The yen bottomed first in the summer of 2015 when China surprised the world with devaluing its currency, and then gold bottomed later that year.

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