Gold Price

Are Gold and the Japanese Yen Equal? (Part I)

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Written by Bullion Exchanges     August 07, 2017    
Gold vs Japanese Yen.jpg

How is JPY/USD related to gold? The similarity between these two charts is striking. Our article offers a direct comparison between JPY/USD and Gold.

In past articles, we have discussed the generally-antagonistic relationship between gold and the US dollar. Still to this day the world’s reserve currency, as precious metals investors we must always keep a close eye on the value of the dollar, as gold stands to be a primary beneficiary if in fact the dollar ever loses a significant amount of value in the future.

Although the value of the dollar versus all foreign currencies must regularly be considered, there is one cross-pair that deserves special attention for its relationship with gold. And that is the dollar versus the Japanese yen. Otherwise labeled “JPY/USD”, we are hereby referring to the value of the Japanese yen as priced in US dollars. How is JPY/USD related to gold?

JPY/USD and Gold

The clearest way to show the importance of the JPY/USD cross-pair and gold is to plot a direct comparison between the two. Below we show JPY/USD (multiplied by 100 for scale) on top, with the price of gold immediately below, since the 2011 peak in gold at $1,923 per ounce:

Japanese Yen comparison

The similarity between these two charts is striking. For example, note how the absolute highs for both gold at $1,923 per ounce and for JPY/USD at 1.32 occurred in Q3 2011. Note too how the large drop in gold which occurred between October 2012 and June 2013 when the metal fell from $1,800 down to $1,175 coincided precisely with the JPY/USD decline from 1.30 down to 0.98. Both continued to bring lower until 2015.

Both assets also surged simultaneously during the first half of 2016, only to give back much of those gains in tandem during the second half of the year.

Ratio Plot

Another way to view the relationship between these two assets is in the form of a ratio. Below we plot JPY/USD divided by the price of gold, since 1998.

In plain English, this ratio asks: “How does the value of the Japanese yen compare to the value of gold?”

Japanese Gold ratio

We can see that over time the graph has moved lower. This means that over the past two decades the Japanese yen has lost considerable value versus gold; in other words, gold has risen as priced in yen. This should generally be expected, as we know all fiat currencies are being debased by their respective central banks over time.

The Yen / Gold Correlation

What is perhaps not so expected is to see the tight correlation since late-2011 that has developed between the Japanese yen and the price of gold.

This correlation can be seen on the lower right corner of the chart via the blue converging trendlines, with the nearly flat price action since 2011.

When a ratio such as this flat lines, it tells us that the two components are highly positively correlated: the two assets are moving closely in tandem.

In this instance, the flat line in the ratio confirms that the Japanese yen to US dollar cross pair is behaving nearly identically to the price of gold. In other words, since 2011 the yen and gold are behaving as the same asset class.

The proof for this statement is visible in the first set of charts that we have shown.

Yen and Gold – the Same?

Of course, fundamentally we know that the Japanese yen and gold are not the same asset classes.

After all, one is a fiat currency which may be printed ad infinitum by a central bank, while the other is a finite element which has served as a store of wealth for at least 5,000 years.

Fundamentally, the yen and gold are certainly not equal. Yet, as we see from the graphs above, the market is treating the two as essentially the same since 2011. What are we, as investors, to make the nearly perfect correlation between the Japanese currency and gold? Why are these two markets so tightly intertwined? More importantly, when will the correlation cease, and how can we use this knowledge in our investment plans going forward?

We will address these questions and more in Part II of this series on the Japanese yen versus gold, next week…

Christopher Aaron,
Bullion Exchanges Market Analyst 

Christopher Aaron has been trading in the commodity and financial markets since the early 2000's. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of- life mapping in Afghanistan and Iraq.

Technical analysis shares many similarities with mapping: both are based on the observations of repeating and imbedded patterns in human nature.

His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.