Yellow Peril

In mid April of this year our blog, “A Yen for Gold,” wrote about the “gold inflation hedge hype” stating the following:-

“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.”

Well, we still do not have a gold standard and, looking at the wonderland-world of central-bankers, one often questions whether we have free-markets.

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Either way, in mid-April we commented on the break of the $1527 support  level, going on to suggest that 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.

What’s happened since?

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The yellow metal continued its sell-off, touching $1180oz towards the end of June, before making a spirited rally since. It has now reached and penetrated resistance at its 100-day moving average, providing scope for further gains, particularly as the blue RSI remains at a moderate 47.49.

However, we also showed the close correlation between the Yen and the Japan’s stock index, observing that $Gold, when inverted to more easily show the relationship, also correlates. As the Yen weakened, the Nikkei rose and $gold also weakened.

As the blue RSI, at 81 on the mid-April chart, inferred that the Nikkei was over-bought, possibly by 10% or so. The situation needed to be unwound and should see a weaker Nikkei over the shorter term, with a stronger Yen and $Gold price.

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So,what’s happened here?

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The blue vertical dashed line shows mid-April point, since when the Nikkei spiked by a further 9%, bolstered by a weaker Yen, dragging the $gold price down a further $165oz. Since then, however, the expected correction for the Nikkei has transpired, with the Yen trending higher and gold retesting the $1400 round number.

We’ll leave you to work out just which instrument is leading here, excepting to say that the “Yellow Metal,” should be watched very closely, else it’s at your peril.

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One response to this post.

  1. […] although it’s been just over a year since our last comment on Gold, entitled “Yellow Peril,” and, “Gold Guidance,” shortly before, it’s an asset class that we have certainly not […]

    Reply

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