Gold’s Fellow Travelers Refute its Higher High

By Tom McClellan

Gold prices versus Japanese yen

Gold prices recently swooped up to a rather spiky looking top, and on Feb. 21 a big drop started the work of unwinding that blowoff.  It was a good looking spike upward as far as gold itself was concerned.  But it did not come with confirmation from other prices which tend to move in sympathy with gold.

This week’s chart compares gold futures prices to the Japanese yen.  Most of the time the two of them move together.  But occasionally they disagree, and that is when things get interesting.

Most of the time when a divergence like this appears, it is the Japanese yen which ends up being right about where both are headed.  It is making lower highs now instead of following gold’s blowoff move, and that is a problem.

I say “most of the time”, because nothing works perfectly all of the time.  And in August 2018, we saw these two move into a strange inverse relationship.  That only lasted for a short time, and now they seem to be back in sync again.  But it was a weird episode, and a reminder that no indication or relationship is perfect.

One explanation for that weird episode is that the Chinese yuan has been trying to take over this job as the bellwether for where gold prices are going.  Here is a comparison of gold and the yuan:

Gold prices versus Chinese yuan

Notice that there is a very strong correlation most of the time, including in that August 2018 period when the Japanese yen was showing an inversion.  And notice also that the yuan now is not (yet) confirming the higher gold price high.

The yen and gold have a much longer relationship than the yuan does.  Here is a longer term look at the yuan and gold:

Gold prices versus Chinese yuan

Before October 2016, the two did not have much of a relationship at all, sometimes moving together, other times not.  Something appears to have happened in October 2016 which locked the yuan into a much tighter relationship with gold prices.  What could that have been?

On Oct. 1, 2016, the yuan (AKA the renminbi) became the first emerging market currency to be included in the International Monetary Fund’s “special drawing rights” or SDR basket of currencies.  Prior to that change, the SDR had included the dollar, euro, yen, and British pound.  It is an “international reserve asset created by the IMF to supplement its member countries’ official reserves.”  Members can exchange SDRs for the constituent currencies, sort of like exchanging an ETF for the component stocks.

That seems to be the event which locked the yuan into its new strong correlation with gold prices.  But whatever the cause of that correlation might be, the point for those who watch gold is that the yuan is now part of the arsenal of indicators which can either confirm or refute a move in gold prices.  And I always like having more tools in my toolbox.

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Chart In Focus Archive

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Gary

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