It's All About That Yen

Tue, Mar 31, 2015 - 11:26am

As the first quarter of 2015 draws to a close, let's take inventory of where we stand and then let's see if we notice anything interesting.

Not really sure where to start so, as MrsF likes to say, we'll take things "in no random order":

12/31/14 close Last YTD% change

GOLD $1184 $1188 +0.34%

SILVER $15.60 $16.76 +7.44%

CRUDE $53.27 $48.42 -9.10%

LONG BOND 2.75% 2.55% +7.27%

10-YEAR NOTE 2.17% 1.95% +10.14%

POSX 90.27 98.51 +9.13%

EURO 1.2096 1.0737 -11.24%

YEN 0.8345 0.8329 -0.19%

S&P 500 2058.90 2079.75 +1.01%

OK, I admit it. I tricked you. Those numbers are not in "no random order". Instead, notice the three items where I've bolded the % return numbers. Hmmm. No why would I do that? Could it be this be another exercise where Turd explains how the algos run everything?

YES! It's exactly that!

As has been documented here ad nauseam, the price of gold is now largely determined solely by fluctuations in the yen. The yen goes down, gold goes down. The yen goes up, gold goes up. Put more specifically...the dominating computer-driven algo trade is long the USDJPY and short gold. The easiest way to show this is by inverting the USDJPY chart and plotting it overlaid with gold. When you do this, you get the chart below...and it's a fair chart with the vertical axes nearly identical in % change:

On a much larger scale, The Banks and hedge funds are also running a paired trade of the yen and the S&P. The chart below shows the USDJPY directly overlaid with the S&P 500. Again, it's a fair chart as the changes in the vertical axes is nearly identical:

So, if you're baffled why "fundamentals don't seem to matter", it's because the fundamentals don't matter. There are very few human traders of size left and the computers control everything. In this environment, arcane notions such as supply/demand and company fundamentals are insignificant. The primary driver to these "markets" are changes to the USDJPY. Control that and you control everything else. With this in mind, is it any wonder why The Fed...hell-bent on driving the US stock market as high as possible to enhance the "wealth effect"...continues to give impetus to the dollar bid by jawboning about higher rates? If you and I can figure this out, you know that Mother Fellen and her Goons have figured it out, too. Talk the dollar higher and let The Machines do the rest. And lest you think that this is just a temporary phenomenon, feast your eyes on the 3-year charts below. Yen--gold on the left and yen--SP on the right:

Of course, like anything else, this "strategy" will work until it doesn't. Just as one day, whether through a Black Swan event or just a snowballing global liquidation, equity fundamentals will re-assert day, too, the paper gold market will be driven low enough that the suppliers of physical metal will be unable to clear all of their trades. This exact situation nearly broke the "market" for gold in early November of last year. London GOFO rates plunged to record low levels and, as you can see on the chart below, it was the one time where the yen--gold trading pair failed:

Though this trade has since re-asserted itself, it's no accident or coincidence that the paper gold "market" once again found a bottom two weeks ago near 50. In the end, anyone worried about a renewed drop in gold should only be concerned with two things:

  1. Can the Bullion Banks find a steady supply of readily-deliberable physical gold at prices below $1150? Back in November, they could not and the physical market drove a rebound in the paper price.
  2. Is the yen going to make even deeper lows? As you can see on the long-term USDJPY chart below, the area just north of 120 is pretty stout resistance and without the yen making new lows, there's no impetus for The Machines to further sell gold.

So, the next time you read the doom-and-gloom predictions of some chart-reader or snake-oil salesman, please simply ignore them. Until the current system breaks, price will continue to be determined solely by changes in the USDJPY and the availability of physical gold to clear trades. At present, nothing else matters.


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Apr 1, 2015 - 10:28am

This has gotta be an April fools joke, right? ... right?

link to story: Mandatory adult vaccinations

The article gets thicker and richer as it goes with this notice at the bottom.

This piece is our annual April Fool's article. Some of the details herein are true, however, and the article could be suggestive of what we might face in the near future, should we fail to take corrective action to protect and preserve vaccine exemptions, informed consent, and medical freedom of choice.

My wife sent it to me and had me going for a while...

It is a joke, isn't it?

Apr 1, 2015 - 8:34am

Operation Jade Helm Intends to Shoot Blanks..Stupid Idea, Stupid

So they intend to shoot blanks in and among the civilian populous and don't expect to get Texas? This is a recipe for disaster, and the leaders know it.

It sounds more like a set-up to me, where they can claim innocence, but they have every intention of turning it into a live action against civilians. All it takes is one concealed weapon carrier to mistake the blanks for real gunfire and "presto chango", the training session goes live.

Me thinks they have been testing too many of their crowd control microwave weapons on their own brains.

Apr 1, 2015 - 5:49am

China-- 46 countries join AIIB by deadline

Article from Xinhua, note Chinese who are known for diplomacy and the tone

"Ironically, the front was broken by its own allies. The AIIB has gained wide support not only in Asia but also in Europe, which clearly told Washington that it had picked up a wrong fight."

"Besides, the loathness or incompetence of the United States to reform the international lending system to accommodate the emerging market countries has greatly damaged its credibility and efficiency."

And then

BEIJING, March 30 (Xinhua) -- U.S. Treasury Secretary Jacob Lew said on Monday that the United States is looking forward to cooperating with the Asian Infrastructure Investment Bank (AIIB), as it welcomes and supports proposals that are helpful to infrastructure construction.

Apr 1, 2015 - 5:46am

Pslv and the declining premium what do it mean?

It means to me that sentiment is very bearish....and I'd say rightly so...Strong dollar , prospects for rising interest rates, declining economy what's to love about silver.

Maybe the fact that it is trading below the cost of production, it is vital to many industries, production is likely to fall and there is only 1 billion oz +/- of the stuff in deliverable form....oh and plus, it looks like JPM is accumulating physical through futures deliveries to its house account and is likely a big buyer of the American Eagles.

I own shares of PSLV and anticipate buying more of them and Silver Eagles, and should I have a desire to waste money I likely will buy a few SLV options.

When confidence in the FED begins to be lost, for whatever reason, and inflation begins to pick up, the velocity of money rises - silver will scream.

Have physical and the closest thing to it...probably PSLV.

That's my story and I'm sticking to it...probably 6 months out before we start to see the rumblings of the move.

Apr 1, 2015 - 3:46am

Wow Japan is a total failure

Billions spent in several QEs. Billions spent in stock purchases. Billions printed to save the housing market. Billions printed to hold the Japan bond market. Billions spent to buy stock futs every day (this morning again)... and look at the results. Who is going to call Abenomics like it is: a MAJOR FAILURE.

From ZH:

Bad news isn't even good news anymore in Japan. A sushi-boat-load of data this evening show once again that Abenomics is failing dismally. In no particular order... Large Manufacturing Index MISS (lowest in 9 months), Large Manufacturing Outlook BIG MISS, Large Services Outlook MISS, Small Manufacturing Index MISS, Small Manufacturing Outlook BIG MISS, and drum roll please... Tankan Large Industry Capex Outlook crashes to -1.2% (from +8.7%) - the lowest in 2 years (since Abewrongics was unleashed).

The Japan CB is completely trapped. If they stop now their insanity the Japanese financial system just collapses. So they keep doing their insane job until things break apart. They have lost one generation, they will kill the next.

Mar 31, 2015 - 9:20pm

SilverIsMoney Agreed completely

SilverIsMoney i agree with your assessment completely. Gold has not bottomed yet. We are still to witness final washout below 1130 to 1000-1080 level. It may intraday do 980 or so. I suspect that 1040-1080 will be the bottom but that also means that GDX and GDXJ will drop another 50% from current levels which will be the washout and capitulation Rick Rule was referring to for past year. COT and sentiment levels right now is in the middle and also was not extremely oversold at 1130 like it was in Nov. For final bottom to form we need sentiment level along with COT to drop to extremely oversold levels that will make people say 850 is coming in 2 week, which it wont. Off of that we will get V shape rally to 1400 most likely so rally will be monstrous 350pts. I'm a gold bug, have been for 8 yrs but i'm on sidelines now. I sold rally at 1300 and now waiting for reentry at much lower levels. Good luck people. I very much agree with SilverIsMoney-

Mar 31, 2015 - 4:16pm

OK but

To summarize the arguments of Turd and SIM: Turd says that the computer-driven algos have paired the price of gold to the yen; SIM that the price of gold is tied to the dollar, whose strength has depressed the whole world of commodities and currencies. In SIM's view, therefore, the correlation in the falling price of both gold and the yen is a circumstantial product of the fact that the yen is suffering along with all else from the dollar's strength. Both are valid, though SIM's blame on the strong dollar rings loud, as it appears to be suffocating everything about it. At all events, gold and silver will rise only if one of two events occur: (1) as Turd says, the paper price scheme falls apart due to a delivery failure. Unquestionably corrrect; however, the reported periodic declines in the availability of tradeble gold have thus far been so minuscule that it appears the banks have an inexhaustible supply, unless and until there is a reason for a wholesale rise in demand; or (2) the dollar falls precipitously, which will prompt flight of capital to gold, collapsing the paper price scheme. The question for PM holders to ponder seems to me then to come down to this: What are the factors or events that will cause the dollar to plummet? Will that event or circumstance occur this fall, as so many seem to suggest? Why, if it will?

Mar 31, 2015 - 3:47pm


Welcome back my friend, how is Colorado?

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Mar 31, 2015 - 3:34pm

OK but

"The CRB is down 33% since July but the price of gold isn't, in fact you may say based off of the other correlations we still have a lot further for gold to fall. If gold had followed the CRB's 33% drop from the July high in both we'd be at $900 gold. Had Gold followed the Euro collapse from their July tops we'd be at $1040 - if it followed the dollar perfectly we'd be at $1070 - if it had actually followed the Yen perfectly and this correlation was absolute then the price of gold should be around $1070 (The Yen/USD was at 100 in July and Gold was at $1340) - if it followed oil we'd be in the 700s. I would say it's fairly encouraging we haven't followed a lot of these other price points exactly but others may look at that and say Gold still has a ways to fall to catch up with everything else and that's why we see dealers offering crazy prices right now."

You're forgetting that physical gold has to be delivered at the paper price or the entire scheme falls apart. This is what stopped the decline back in November and it is what is holding gold up now.

Until and unless The Banks can find a readily available source of physical gold, price simply isn't dropping as low as you suggest, regardless of what the other "commodities" are doing.

Mar 31, 2015 - 3:29pm

They are all expecting a price decline...

Like I said a few weeks back. The biggest issue is people continue to look at gold in a vacuum. This correlation with the yen is only one of many as you can see the same correlations with the Euro, Oil, the CRB and nearly every commodity that makes up that index, plus the USD. The correlations in all of these are not perfect but generally speaking it's just as close as the Yen (What happened in January and February? The Yen dropped roughly 5% while Gold went from $1310 down to the $1140s?) None of these correlations are perfect because there's a variety of factors that drive all of these carry trades. Even if one was to admit the USD/JPY is driving Gold then the next logical question would be what drives the USD/JPY because in reality those factors are what drive the price of gold. But again, you see these correlations in all major currencies and commodities one way or another.

We saw this play out the exact same way during the depression. As the Eurozone crumbles the USD will surge and everything will come under pressure until the world wide system breaks and the USA is the last domino to fall.

PMs are going to continue to come under pressure under the dollar reverses and the dollar won't reverse until it's the last man standing just like the 1930s at which point the government may need to revalue gold just to generate inflation (as Rickards has suggested and had happened in 1934) or the monetary system will be reset in some kind of fashion in which gold will at least be revalued in a basket with other currencies.

Either way when you consider how badly the CRB has been beaten down since Oil collapsed the decline in silver and gold is not unexpected. Yes, there's a relationship with the Yen, but there's also a relationship with the Euro, Oil, the Dollar, Treasuries and whole bunch of other commodities that all relate back to the confidence in the dollar.

As the dollar continues to surge on a Euro, Yen, and Emerging Markets collapse we will see the price of oil and all commodities continue to fall in USD and the farther oil falls the cheaper it is for miners to dig gold out of the ground as it is by far their number 1 expense.

The entire "physical limit" arguments we've heard for 4 years now didn't consider this part of the equation. If David Morgan is right we're down to $14 silver and sub-1000 gold for cost of production where the price of oil is currently at. If the dollar continues to rally and crude continues to collapse the cost of production for miners will continue to significantly drop and the cartel will continue to smash price right at the levels where the miners can barely survive but hopefully do not go bankrupt.

This is why there is no end in sight for the gold and silver price collapse until the dollar reverses because the dollar will crush oil which decreases mining costs. I've maintained for a long time now that I think it will finally fall apart this fall, at which point gold and silver will decline with everything else, finally bottom, and surge to the levels we need to get the bull market started back up but I continue to advise everyone to be very cautious in buying here because the Euro situation is still unresolved and the folks at the fed are crazy enough to invert the yield curve against and crush commodities even further just to maintain the illusion and it's got to be obvious to everyone here at this point the machines don't just manipulate gold they manipulate everything.

The CRB is down 33% since July but the price of gold isn't, in fact you may say based off of the other correlations we still have a lot further for gold to fall. If gold had followed the CRB's 33% drop from the July high in both we'd be at $900 gold. Had Gold followed the Euro collapse from their July tops we'd be at $1040 - if it followed the dollar perfectly we'd be at $1070 - if it had actually followed the Yen perfectly and this correlation was absolute then the price of gold should be around $1070 (The Yen/USD was at 100 in July and Gold was at $1340) - if it followed oil we'd be in the 700s. I would say it's fairly encouraging we haven't followed a lot of these other price points exactly but others may look at that and say Gold still has a ways to fall to catch up with everything else and that's why we see dealers offering crazy prices right now.

Also consider again that if many of these miners are desperate (which at this point you could argue they are) then they will continue to sell their production forward regardless of whether they have the physical in hand and it will only act to suppress price further.

Until we get a truly physical market the miners have confidence in selling in this deflationary spiral will take gold with it because it does not trade in a vacuum and machines are crushing everything because the dollar crushes the prices of all commodities. It sucks we're going to have to go through this but it's going to be what's going to be. Once CONFIDENCE is lost in the dollar and everyone has lined up on the bearish side of gold/oil/commodities we'll reverse but as of right now neither of those things has happened and they won't happen until the other major currencies die first because fundamentals of commodities do not matter only the algo trades matter now and the physical limits we think the algos are held to won't exist if all commodities get crushed in tandem with the metals.

If you have already built up a substantial stack just understand this for what it is and just wait for the prices to become buys of a lifetime. We, unfortunately, still aren't there... imo and we will have to see a significant dollar reversal before we are and we aren't going to see that until speculators lose confidence in the USD.

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