In past articles, we have discussed the generally antagonistic relationship between gold and the US dollar. The dollar versus the Japanese Yen also deserves some attention. As precious metals investors, we must always keep a close eye on the value of the dollar. Because gold stands to be a primary beneficiary if the dollar ever loses a significant amount of value in the future.

Although the value of the dollar must weigh against all foreign currencies, there is one cross-pair that deserves special attention for its relationship with gold. And that is the dollar versus the Japanese yen. Otherwise labeled “JPY/USD”, we are at this moment referring to the value of the Japanese yen as priced in US dollars. How is JPY/USD related to gold?

Japanese Yen, US Dollar, and Gold

The most precise way to show the importance of the JPY/USD cross-pair and gold is to plot a direct comparison between the two. Below we show JPY/USD (multiplied by 100 for scale) on top. The price of gold immediately below. The 2011 peak in gold at $1,923 per ounce:

Japanese Yen _comparison

The similarity between these two charts is striking. 

For example, note how the clean highs for both gold at $1,923 per ounce and JPY/USD at 1.32 occurred in Q3 2011. Note between October 2012 and June 2013 how the massive drop in gold occurred. This drop was when the metal fell from $1,800 down to $1,175 and coincided precisely with the JPY/USD decline from 1.30 to 0.98. Both continued to bring lower until 2015.

Both assets also surged simultaneously during the first half of 2016. They only give back much of those gains in tandem during the second half of the year.

Ratio Plot

Another way to view the relationship between these two assets is in the form of a ratio. Below we plot JPY/USD divided by the price of gold, since 1998.

In plain English, this ratio asks: “How does the value of the Japanese yen compare to the value of gold?”

Japanese Yen Gold ratio

We can see that over time the graph has moved lower. This means that over the past two decades the Japanese yen has lost considerable value versus gold. In other words, gold has risen as priced in yen. This should come as no surprise, as we know their respective central banks are debasing all fiat currencies over time.

The Yen / Gold Correlation

What is perhaps not so expected is to see the tight correlation since late-2011 that has developed between the Japanese yen and the price of gold.

This correlation shows on the lower right corner of the chart via the blue converging trendlines. The flat price action shows since 2011.

When a ratio such as this flatlines, it tells us that the two components are highly positively correlated. The two assets are moving closer in tandem.

In this instance, the flat line in the ratio confirms that the Japanese yen to US dollar cross pair is behaving nearly identically to the price of gold. In other words, since 2011 the yen and gold are acting as the same asset class.

The proof for this statement is visible in the first set of charts that we have shown.

Japanese Yen and Gold – the Same?

Of course, fundamentally we know that the Japanese yen and gold are not the same asset classes.

After all, one is a fiat currency that may be printed ad infinitum by a central bank. The other is a finite element that has served as a store of wealth for at least 5,000 years.

Fundamentally, the yen and gold are indeed not equal. As we see from the graphs above, the market is treating the two as essentially the same since 2011. What are we, as investors, to make the nearly perfect correlation between the Japanese currency and gold? Why are these two markets so tightly intertwined? More importantly, when will the relationship cease, and how can we use this knowledge in our investment plans going forward?

We will address these questions and more in Part II of this series on the Japanese yen versus gold, next week…

 


Christopher Aaron,
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. The CIA is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.

Technical analysis shares many similarities with mapping. They are both a base of observations of repeating and embedded patterns in human nature.

His strategy of blending behavioral and technical analysis has helped him and his clients. It has helped to identify both long-term market cycles and short-term opportunities for profit.

This article is provided as a third-party analysis. It does not necessarily match the views of Bullion Exchanges. Readers should not consider it as financial advice in any way.

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