The USDJPY and the "Price Of Gold"

54
Tue, Nov 29, 2016 - 11:07am

Well, we've finally reached "contract expiration" day as the Dec16 Comex gold and silver contracts go off the board and into "delivery" at the close today. With total Comex open interest now back to the levels of last December, could price finally be near a bottom? As usual, we must look at the USDJPY for clues.

As of last evening, total Dec16 Comex gold open interest was down to just 30,773 contracts and about 50-60% of those will be liquidated and closed out today, leaving 10,000-15,000 "standing for delivery" when "delivery" notices begin being sent out this evening. Last December only saw a total of 2,073 gold "deliveries" so we'll likely be on pace again for something 5X or greater by the time "deliveries" wrap up at the end of the month.

Additionally, TOTAL Comex gold open interest fell again yesterday to a meager 410,824 contracts. Check this out:

DATE PRICE TOTAL OI

11/25/15 $1072 393,110

12/31/15 $1065 415,220

7/11/16 $1364 657,776

11/28/16 $1191 410,824

So, do you see how this works? Taking their cues from a few key inputs, the HFT Specs buy Comex paper gold exposure and price goes up. To limit the upside damage, The Banks issue new contracts in order to dilute the price impact of all this Spec buying. As the cues change and reverse, the HFT Specs liquidate their gold exposure and price declines. The Banks use this Spec selling to buy back their short positions and the open interest gets retired.

Have the supply/demand fundamentals of physical gold changed over the same time? Maybe just a little as sentiment and physical demand generally improve with a rising price. But by far the key determinant of "price" is the HFT Spec demand for the paper gold derivative, not the actual gold itself.

Some System Apologists will claim that this is efficient and smart...that the cost of acquiring, holding and storing real gold is too great and therefore these derivatives and synthetic forms of gold are preferable. NONSENSE! What I see instead is a Banker Profit Scheme and Confidence Game. The Banks create and manage nearly all of the forms of synthetic gold exposure available today, from futures contracts to unallocated accounts to the GLD, and because they have the power to create from thin air as much synthetic gold as "the market" demands, they also have the de facto power to control price. And they do.

So, OK then. It is what it is. As long as The Banks retain control, the only way you can get "the price of gold" to move higher is to move in your favor the key inputs which drive the buying decisions for synthetic or paper gold. And what are those key inputs?

  • Forex...specifically the USDJPY
  • In a larger sense, the US dollar as measured by the POSX (TFMR slang for the DXY)
  • And, as it's the US dollar gold price that we measure most, the general trend and level of US interest rates, particularly US interest rates adjusted for inflation or "real" rates

That's it. It's those three. Get all of those three working in your favor as we did in the first half of 2016 and you get a 30% rally. However, when all of these turn against you as they have since late September, WATCH OUT!

You've now seen these charts for what must seem like a million times. The inverted USDJPY is in candles and the "price of gold" is in bars. Again, do you see a fundamentally-derived "price of gold" in these charts or do you simply note two closely-correlated digital "assets", where HFTs "see" a move in the USDJPY and instantly buy or sell paper gold in response?

To that end, let's end this post on a positive note...

A week ago, some eco-quants at JPM issued a forecast for the USDJPY that projected a fall back to 100 or even lower. Well today, UBS came out with a nearly identical forecast. I would strongly suggest that you take the time to read this very closely: https://www.zerohedge.com/news/2016-11-29/usdjpy-could-plunge-low-98-aft...

Again, when the USDJPY was near 100 last summer (or 1.00 JPYUSD on the charts above), "gold" was primarily between 30 and 80. Why? The HFTs had observed the fall in the USDJPY from 120 to 100 and, in turn, purchased "gold exposure" at the Comex. Total Comex open interest surged by over 50% and the price of that gold exposure rallied by over 30%.

Could we be on the verge of another such rally? Well, I hope by now you've figured out that the USDJPY holds the key. If the quants at JPM and UBS are correct, prepare for upside in 2017 and not the doom-and-gloom downside that the usual permabears are attempting to convince you is coming.

TF

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  54 Comments

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@KoosJansen
Dec 2, 2016 - 9:47am

That's the question

Since the HFT algos are pre-programmed, are they simply programmed to buy/sell gold vs the USDJPY as a simple risk-on/risk-off trade? Is there a more complicated reason? Who can say?

But the chart doesn't lie and it shows an overwhelming correlation all the way back to about 2007. So again, does the physical market move "price" on a day-to-day or intraday basis or, instead, is price "discovered" by this electronic trading that takes its cues from some items completely unrelated to the fundamentals of the underlying commodity?

@KoosJansenTF
Dec 1, 2016 - 5:15pm

USDJPY

Yes, I mean, "how does the correlation between gold and USDJPY work?"

What's the arbitrage for these HFTs? They only trade when making money. I don't understand why they buy or sell gold when JPY moves - or vice versa. Is there some carry trade?

Nov 30, 2016 - 10:06am

And I just saw this idiotic

And I just saw this idiotic comment at Silverdoctors so I thought I'd address it here so that we're all on the same page...

"For years" I have been saying that the only thing that will finally break The Banks and end the manipulation is physical demand. That has not changed at all and is still 100% accurate.

The point of this post is to demonstrate again that the paper derivative price is more connected to forex and HFT trading than it is physical gold supply/demand. Once people understand that, they're more likely to understand the fraud/fallacy of the entire paper derivative pricing scheme.

@KoosJansen
Nov 30, 2016 - 10:00am

Hi, Koos. Nice to see you.

I'm going to suppose a typo on your part and that you meant "how does the correlation between gold and USDJPY work?"

It works by HFT, which in addition to making up 80%+ of the NYSE and NASDAQ trades each day, is now the dominating force in all markets, including metals futures.

In my supposition, the HFT have been programmed to buy or sell gold futures based upon nearly tick-by-tick changes to the USDJPY. US bond prices clearly impact these HFT as well but, as the charts above show, USDJPY is the most prominent driver.

@KoosJansen
Nov 30, 2016 - 8:33am

USDJPY

So how doe the correlation between USD and JPY work? What is cause and effect? And how does it interact?

Danforth Coxwell
Nov 29, 2016 - 9:09pm

Angry Chef...

Interesting article to say the least. The article goes a long way in explaining what is driving Modie's recent policies regarding the rupee.

Indians I will not buy into Modi's scheme. Indians understand that the ruppe has dropped in value. Every housewife in India knows that basic staples such as cooking oil, onions, rice, ghee, wheat and lentils cost alot more than five years ago. How will Indians protect their wealth? Same way they have been doing for thousands of years. Indians will buy gold. If finances do not permit, silver will do.

Yes we are seeing panic regarding the supply of gold in the west.

Thanks

Picabo
Nov 29, 2016 - 4:25pm

I just want to know

Where is our current analyst savant Golden Turtle???

Yukajub
Nov 29, 2016 - 4:23pm

For those obsessing on the short term USDJPY

The trendline broke hard yesterday and bounced off previous resistance perfectly. Now it is meandering. The longer it stays below that trendline, the harder it will be to continue up as bullishly. It would need to reach previous highs to get back above the trendline and resume course. This seems less likely the longer we go sideways. Getting under that horizontal resistance would be good for gold to continue carving out a bottom.

Visit the FAQ page to learn how to track your last read comment, add images, embed videos, tweets, and animated gifs, and more.

Dr. P. Metals
Nov 29, 2016 - 4:16pm
murphy
Nov 29, 2016 - 4:12pm

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