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Friday, January 16, 2015 1:37 PM

Is Faith in Central Bankers Ending? Disinflation or Deflation? Yen-Gold, Euro-Gold Trend Breaks

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Is Gold Tracking Anything?

Numerous people reported last year that the Yen/Dollar (JPY/USD) pair and gold were moving in a direct synchronous relationship. If one rose or fell, so did the other.

I made some comments regarding the relationship on December 12, 2014 in Is Gold Tracking Movements in the Yen, Euro, Anything?

Since the beginning of the year, gold has tracked movements in the euro even better than the Yen. But look still closer. Since November, gold has been inversely correlated to both the Yen and the Euro.

This past year shows why these kinds of correlations are typically meaningless. Sometimes gold tracks the euro, sometimes the yen, sometimes the dollar, and sometimes inversely to all of those.

I see no fundamental reason for gold in dollars to track the Yen.

For whatever reason (or more likely, for no reason at all), the divergence since November (a shift to an inverse correlation from a positive one), might be the end of the previous trend.

Often, by the time people spot such trends, that trend is about to end.
Yen-Gold, Euro-Gold Update

Gold did track the JPY/USD pair since 2012, but that trend appears over.Perhaps it starts again, perhaps not.

Here are a pair of fresh charts courtesy of my friend Nick at SharelynxGold (Gold Charts "R" Us). Subscriptions Required, Red and Blue Arrow Annotations Mine

Euro vs. Yen vs. Gold

Click on Any Chart for Sharper Image

Euro vs. Yen vs. Gold Since October 2014 

Starting early November, gold has been inversely correlated to the JPY/USD pair. Similarly, gold had been correlated to the euro but that changed to an inverse relationship in late December.

I specifically asked Nick for a chart starting October of 2014 to show the trend break that I knew had taken place.

Fundamental Reason?

Although I commented in December I saw no fundamental reason for the relationship, that does not mean there wasn't one.

Today I offer three speculative possibilities

  1. Gold generally does very poorly in disinflation (falling rates of inflation), and that's when other asset classes perform best. The period from 1980 to 2000 is a perfect example.  In contrast, gold has historically done well in deflation, stagflation, and rising credit risk in the senior currency (in this case, the US dollar). The great depression is a perfect example. 
  2. Belief in central banks' ability to control things forever is finally coming into question, as well it should.
  3. Gold does well when the soundness of the global financial system comes into question.  

All of the above may be true.

For thoughts along those lines of number 2, please see ...

From the Down the Rabbit Hole ...

Morals of the Story

  1. Don't borrow money in other currencies, especially long-term mortgages.
  2. Don't expect currency interventions to work forever.
  3. Don't believe statements made by central bankers. They are not the economic wizards they are made out to be, and they often lie when it suits their purpose.

Number 3 is the most important one. For further discussion of point 3, please see Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph.

Mike "Mish" Shedlock

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