Interested in Where Gold is Heading? Follow the Yen

The chart below is that of the Japanese yen which you can see has been in a steep downtrend since 2012, losing almost 38% of its value against the dollar during that time. For those not familiar with currency movement, this is a BIG move for a currency but not unexpected considering Japan’s Prime Minister’s extraordinary move in an attempt to stimulate Japanese growth.

bay area financial advisor, wealth manager, certified financial planner

As you can see in the lower right hand corner of the chart price has (temporarily) halted its decline and has been trading in a range for the most part of a year. The interesting thing to note is this consolidation has allowed the (blue) 40 week moving average (40 WMA) to flatten out and begin to curl upward from a previous downward slope.  Additionally, price is now above that same 40 WMA for the first time since a brief stint in 2014 and prior to that, 2012. Additionally, if this consolidation continues and price moves higher it will be the first time these two conditions will have existed since 2011, the end of the last uptrend. One final constructive point to mention is that positive divergence has formed on the RSI momentum indicator telling us to expect a short term (and possibly more) reversal.

For those that have listened to my videos, for a bottom to take place after a steep downtrend, the above two conditions must be in place. Of course, just because they do does not guarantee a bottom is in but a bottom cannot happen without them. As such, this development deserves to be closely watched because a reversal in the Yen has some interesting implications which I would like to show you in my next chart.

The chart below is the same one as above except for the fact I have added the price of gold (dashed gold line) in the same pane as the price of the Yen. What should be obvious is that the price of gold has a very high correlation with the Yen, that is, it moves pretty much in lock step. Therefore if the yen does actually bottom, we would expect to see a commensurate bottom in precious metals if the correlation were to continue.

investment adviser bay area certified finacial planner wealth manager

While the Yen hasn’t officially bottomed yet, I am very skeptical that it actually will. For now I see this attempt as just a corrective counter-trend move with prices to eventually move even lower still. This is due to my strong belief the dollar will eventually move much higher once done with the consolidation it is going through. As such strength in the dollar will have negative impact on the Yen, since they are negatively correlated. Even though I have my beliefs, I have to respect what the charts are telling us and as such let them dictate where to put investment dollars. If this turns out I am wrong and this is a Yen bottom, I will quickly look to confirmation in precious metals and likely find a home for (at least a small chunk) of our horde of idle cash.

While currencies are not great instruments to trade in brokerage accounts, because of inter-market relationships they occasionally provide early warnings for other things that are. As such, they continue to be worth following.