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Gold bulls don't be too happy too early! Historical signal has been lit red
Bullion Exchanges market analyst Christopher Aaron said that the key indicator for predicting gold, the correlation between the yen and gold, flashed a warning signal again.
The yen and gold have had a very strong correlation over the past eight years and are growing.
The top half of the chart below shows the trend of the yen (×100) against the US dollar since 2011, and the lower half is the price trend of gold. There is a striking similarity between the two:
Gold peaked at $1,923 per ounce in September 2011.
At the same time, the yen peaked at 1.32 in two months.
The yen against the US dollar formed a lower high at 1.30 in September 2012.
Gold formed a lower high at $1,800 per ounce a week later.
The two fell simultaneously for nearly three years, from the end of 2012 to 2015.
The yen against the US dollar first formed at the bottom of the 0.80 at June 2015.
At the same time, gold bottomed out at $1,045 per ounce six months later.
From the peak to the percentage of the valley, the yen fell 40% against the dollar, and gold recorded a similar decline, down 45%.
Both both soared in 2016. The yen rose 25% and gold rose 32%.
After the soaring in 2016, the yen's 38.2% retracement of Fibonacci in the June 2016 decline in 2011-2015 peaked.
Gold peaked in the 38.2% correction of the same downtrend two weeks later.
Gold broke through the 2011-2017 long-term downtrend line (green-green line) in July 2017.
Six months later, the yen broke through a similar downtrend line in January 2018.
Both the yen and gold fell below the 2015-2018 uptrend line (dark blue line) in July 2018.
The trend since 2011 clearly shows the close correlation between gold and the yen, and now look at:
In January 2019, the yen failed to return to the top of the trend line (red circle).
So far, gold can barely maintain its recovery efforts.
In other words, the question is, even if the yen rebounds, can gold still get rid of the correlation between the two and then go higher?
Or, conversely, will the correlation between the two be maintained in 2019 and 2020? If this is the case, the trend of the yen may indicate that the price of gold will continue to fall in the coming months.
Probability of continuation of relevance
During all the key turning points of the past eight years, the yen and gold fluctuated in the same direction during the six-month period of change.
Since 2011, there has been no major deviation between the two.
Therefore, if the yen continues to fall and gold breaks the correlation between the two, then this will be the first time these two assets have split up in the past decade.
Although this possibility exists,There is currently no evidence that the correlation has been cut off. Therefore, the most likely scenario is that gold should continue to decline in the coming months until both can stabilize.
The ratio of yen to gold can also prove that the correlation between the two is still valid.. The drop in the ratio means that the yen depreciates against gold. For example, from 2000 to 2011, the value of the yen relative to gold was reduced by 80%. But what's interesting is that the ratio has been flat since 2011, and the change is very small.
Why is correlation relevant?
Possible reasons for this strong correlation between the yen and gold include:
Japan’s overall inflationary downturn has led investors to view the yen as a safe haven at some point.
The yen carry trade continues to prevail, and investors borrowed yen to invest in other markets. Therefore, when “risk assets” are favored, downward pressure is exerted on the yen, and gold will be suppressed when the market risk is high.
The continuing influence of traders: Market participants are accustomed to the role of the two for a long time, so that it becomes a self-fulfilling prophecy - they buy gold when the yen is strong and sell when the yen is weak Out of gold, and vice versa.
Although the reason may not stop there, but more importantly, when this correlation between the two ends. What investors need to pay attention to is that the ratio of yen to gold eventually breaks in a certain direction.
Editor in charge: Lu Shan RF10057
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