GOLD AND JAPAN HIT NEW HIGHS -- THEY'RE STILL CLOSELY CORRELATED
NEITHER ONE HAS CORRECTED ... A couple of weeks ago I expressed some concern that gold prices might stall or pullback temporarily from long-term supply around $500. Obviously, that didn't happen. Gold has since jumped another $40 to a new 24-year high. It was up over $10 earlier today. Last week I wrote that the red-hot Japanese market has reached overbought territory and might have even started a short-term correction. Last night's 2.17% gain in the Nikkei pushed that market to a new five-year high. In fact, gold and Japan are two of the strongest markets in today's trading. That doesn't necessarily alleviate my concerns that both markets are still looking somewhat over-extended and ripe for some profit-taking or at least some consolidation. But so far my writing about the start of a correction has been premature. As one of our readers reminded me, however, I also wrote several times recently that the gold and Japanese markets have become highly correlated. He pointed out that my call for a correction in Japan while gold was rallying seemed a little inconsistent. Truth is I expected a pullback in both and have gotten neither. The fact that both are hitting new highs today, however, does strengthen my conviction that they are tied together for reasons not entirely clear. The theory I've adopted is that the rising Japanese market is signaling the end of the deflation era that lasted roughly from 1997 to this year which has kept global inflation and interest rates unusually low. That may also be signaling that the next couple of years could see a rising trend both in global inflation and interest rates. I suspect that's what the bull market in gold is telling us. Another explanation is that a lot of the buying of gold is coming from Japan and may be tied to the collapse in the Japanese yen.
Chart 1
GOLD/YEN ACHIEVES MAJOR BULLISH BREAKOUT... Chart 2 shows what a chart of gold looks like to a Japanese trader. It shows bullion quoted in yen. The chart shows bottoming in gold/yen around year 2000 which was when gold bottomed against the dollar. It wasn't until the third quarter of this year, however, when gold/yen achieved a major bullish breakout above its 1996-1997 highs (green arrow). In my view, that probably provoked a lot of Japanese gold buying. For the record, 1997 was the year of the Asian currency crisis when deflationary forces spread from that region around the globe. Japan was a big exporter of deflation. The ability of the gold/yen price to exceed that high is another sign that the deflationary era resulting from "Asian contagion" has ended.
Chart 2
GOLD/YEN IS VERY OVERBOUGHT ... Chart 3 gives a longer term view of the gold/yen chart. Although the trend is clearly up, the monthly RSI line is in the most overbought territory in twenty years. Over the long-run that's a good thing. Over the short-run it may not be. It suggests to me that either gold is overbought or the yen is oversold (or both). As you know, I've been bullish on gold for several years and Japan for several months. I just happen to feel that the current spike in gold prices isn't the optimum time to be jumping aboard. I get nervous when CNBC starts covering the gold surge on a daily basis (even if they keep calling it a bubble). FYI, a bubble is anything the TV analysts didn't see coming or don't understand.
Chart 3
