A Yen for Gold

It’s been a tough past week for the commodity space and particularly for the precious metals space, led by Gold, which has just had its worst two day performance since 1983.

The newswires have provided a rafter of reasons for why the gold price has slumped, including China’s slowdown, as confirmed by the release yesterday of Q113 GDP, rumours that Cyprus was to sell their gold reserves to meet their increased proportion of the latest European bailout, amounting to some 400m ounces, or the best and perhaps daftest suggestion, from the head of the IMF, Ms Lagarde, “ the global economy was improving and “no longer looks quite as dangerous as it did six months ago.

Do these folk ever look at chart patterns? If they did they would have seen the warnings back in October 2012 when the price started to slide from the September $1787oz retracement high. In fact, our last blog of 2012, “Something’s Gotta Give,” penned on the 19th December, warned of the divergence seen between the physical price of gold against the gold-mining stocks and stated the following in respect of the “gold inflation hedge hype”:-

“As an investment against inflation history tells us that under a gold standard, gold rises during DE-flation and falls during IN-flations. Likewise, in a free market, gold falls during a DE-flation and rises with IN-flation.”

weekly_blog_130416_01

Furthermore, since its all-time high of $1921oz, seen in September 2011, the price has found support at the $1527 level, until now. This is a major factor and explains just why the price slide has turned into a slump. Stop-loss orders will have been triggered and much of the recent hot money will have stampeded back out of the trade.

With the RSI, shown in blue, becoming over-sold, at 19, we should expect a bounce for the gold price, possibly back towards the $1527 line. However, this will only be a bounce and further falls, to below the current price, are likely.

Returning to the newswires, a comment on CNBC suggests the following:-

Though the near-term ride could get bumpy, history suggests the recent sharp sell-off in gold is unlikely to have a pronounced impact across other markets.”

Once more we ask, do these folk ever look at chart patterns?

We did within the 14th February 2013 blog, “A Yen for a Weaker Currency,” which showed the close correlation between the Yen and the Japan’s stock index, the Nikkei Dow 225.

If we now show an update of this relationship, we can observe that this relationship still holds, as the Nikkei rises, the Yen weakens.

weekly_blog_130416_02

By adding the $Gold price, inverted to more easily show the relationship, one can see that as the Nikkei has rallied, the $Gold price has also weakened. This correlation is also likely to continue, so where next?

The blue RSI, at 81 on this chart, shows that the Nikkei is over-bought, possibly by 10% or so. This situation needs to be unwound and should se a weaker Nikkei over the shorter term, with a stronger Yen and $Gold price.

After that, watch out!

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One response to this post.

  1. […] mid April of this year our blog, “A Yen for Gold,” wrote about the “gold inflation hedge hype” stating the […]

    Reply

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