Gold: Long and intermediate trends crushing commercials

April 12, 2016 02:18 PM

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Precious metals expert Michael Ballanger discusses the tug-of-war going on between the Japanese yen and the U.S. dollar/Chinese yuan, and its effect on precious metals.

The epic battle between the bears and bulls rages on with this completely annoying seesaw action all dominated by the short-term interventions in the Japanese yen versus the U.S. dollar/Chinese yuan. I frame it as such because the yuan is pegged to the dollar and relations between the Chinese and the Japanese are about as good today as they were in 1894–1895, and not much better than in 1939. 


The good news, if there is any, is that this is a currency war, as opposed to a "boots on the ground" war, and I am convinced that it is a function of two large Cray supercomputers struggling to outmaneuver one another in manipulating the Japanese yen in one direction or another. The Japanese would love to see the yen collapse against the U.S. dollar, making Japanese goods cheap in terms of both U.S. dollars and Chinese yuan while placing the edge in international trade firmly in the lap of Tokyo. Beijing, however, wants the yen to soar against the dollar and the yuan, making Japanese goods less competitive and thus giving the edge to the Chinese.

In the old days, these two Asian gargantuans would be mining each other's harbors and blowing up foreign embassies, but since mankind has reverted to more civilized methods of international conflict such as cyber-warfare and "Space Invaders-style" currency combat, the overt remnants of conflict can only be seen on a Bloomberg terminal.

The chart above overlays the gold price on top of the yen-dollar going back to the top of the precious metals markets in late 2011. It is astonishing how perfectly correlated the two are. The Bank of Japan has been working diligently to absolutely trash the purchasing power of the yen with QE-to-infinity policies and now negative interest rates. But, in the middle of last year, for some strange reason, the yen suddenly reversed, and after peaking in late 2011 at over 1.30 (at nearly exactly the point where gold topped), the yen has been moving higher versus the U.S. dollar.

What is interesting to me is that these knee-jerk intraday movements in the Japanese currency do not look NATURAL; they look as if someone is probing an exposed nerve-ending with a cattle prod. To get a sudden 50-bps reversal within seconds of a new low or new high intraday price point is not only strange, it is dangerously bizarre, as many of the equity-based pair trades respond by whipping the stock futures around like a kite in a windstorm.

The bullion bank behemoths are doing everything in their power to keep the lid on gold and silver prices but the longer we are witnesses to this resistance of my beloved gold miners to these egregious raids on the Crimex, the more the likelihood that this epic battle will be resolved to the upside. The HUI yesterday achieved a new closing high for the move since Jan. 19, and while it didn't take out the intraday high from St. Patrick's Day, it is within a hare's breath from doing so.

Since I have been a vocal proponent of the predictive qualities of the gold miners in telegraphing moves in gold, I have had to really dig down and assess whether or not this wonderful move in my beloved miners is a simple valuation "decompression" coming off the absurd lows of January (that were created by a forced liquidation within one of the crude-oil-sensitive sovereign wealth funds). Was this move in the miners predominantly short covering or is it something much larger with mammoth capital flows re-entering the sector?

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