Something’s not quite right

The 2019 equity market rally has continued unabated with the S+P 500 rebounding this

week by as much as 17% from its end of December lows. The moves there and elsewhere in

equity markets generally have ensured that the JPY has also weakened further. The USDJPY

has continued to reverse its early January fall which saw it drop to as low as 104.87. The

price reached as high as 111.13 yesterday. Admittedly the price has backed off a bit this

morning, but relatively speaking, still remains elevated.

Meantime though gold has also remained elevated, continuing to hold gains above $1300

(currently $1314.50) even as the JPY has weakened and those equity markets have

continued to push higher. Now, normally one would expect that not to be the case as

generally speaking there is a pretty close correlation between gold and the JPY.

Consequently, there is also a similar correlation between gold and the equity markets/risk.

However, gold does tend to track the JPY more consistently. To get a better idea of how

close that JPY/GOLD correlation is have a look at a 5year chart of the two below.

So, as you can see when viewed over a 5year time frame the price of the dollar per JPY

(that’s JPYUSD not USDJPY) and gold priced in dollars have tracked each other pretty

religiously over the period. However, if you look closely at this you will note that the two

have gone their separate ways in recent weeks- a move that’s perhaps better demonstrated

by looking at a shorter term chart of the two.

This second chart tracks the price of JPYUSD and Gold over a much shorter time frame- the

past 200 days and as you can readily see; the price of gold has remained elevated even as

the JPY has weakened. So why is this happening? Well, that’s not easy to answer, but what I

have heard this week; is that apparently certain central banks have been quietly buying the

metal in the market and that’s helped to keep the price elevated when by all the usual

metrics it should have slipped back in tandem with the Japanese currency.

Now, I cannot tell you who those protagonists are and of course the list could potentially

have quite a few names on it too, but one thing is for sure, and as you can see, the JPY/Gold

correlation has diverged for now. So the question is will that divergence continue or will it

come back into line at some point soon? The USDJPY coming back to around 110.30 this

morning is now pivotal again between any sustained break either side of 105-115- levels

above and below which have both been tested, and subsequently rejected over the past


Perhaps it’s the equity markets that will be the catalyst for the next move in the JPY and

hence that will eventually feed its way back into the gold price or vice versa? Well, before I

try to answer that with any degree of certainty; lets have a brief look at what else has

unfolded this week. The German GDP print confirmed no growth whatsoever in Q4 2018

which wasn’t exactly a surprise to me. However, what did surprise me was US December

retail sales dropping off a cliff. UK inflation fell back too this week which was also a surprise

given the level of the pound. However, I think we can probably blame that on lower oil

prices and generally heavy price discounting resultant from the Brexit induced demand glut.

January Chinese CPI prices also surprised the markets by falling below expectations earlier

today. Once again that fall is surely more about demand than it is about supply.

So, the latest news out there from all quarters is not surely not conducive to further equity

gains is it? Unless of course this is all simply down to optimism over China and the US

resolving their trade dispute? That is entirely possible of course, but if that’s not the driver,

then and as the title would suggest: something doesn’t seem right. Either this equity market

rally will run out of steam soon or gold will have to give up its gains because history tells me,

that unless something significant has changed in terms of the correlated dynamics, then the

current JPY/Gold divergence will not last forever.