GOLD'S RISING AGAINST ALL FOREIGN CURRENCIES -- THE RISING YEN BOOSTS JAPAN ISHARES -- WHY JAPANESE LEADERSHIP IS GOOD FOR GOLD AND BAD FOR BONDS -- EWJ NEARS 2000 HIGH

GOLD IN FOREIGN CURRENCIES ... One of our readers asked if the falling dollar is the only reason that gold is rising. The answer to that is most certainly no. Since gold is quoted in U.S. dollars, a falling dollar produces higher gold prices. That means that gold rises in the same direction as foreign currencies. If the falling dollar was the only thing pushing gold higher, then gold would rise at about the same speed as foreign currency markets. That's just not the case. The way we can tell that is by charting gold in foreign currency terms. Chart 1 shows the trend of gold quoted in three of the major foreign currency markets. [You can get the same chart by dividing gold by each currency]. The top chart shows gold denominated in Euros (blue line) and the Japanese yen (orange line). The chart clearly shows gold soaring in both currencies. That tells us that there's a lot more going on than just currency translations. The most impressive picture is gold denominated in Canadian Dollars in the bottom chart (green line). Consider that the $CDW is trading at the highest level since 1978. And gold is rising even faster than that. In my latest book on Intermarket Analysis, I showed a similar chart and wrote that this was the first time that gold was rallying against all currencies since the 1970's. I took that as early sign that gold was embarking on a huge bull market. That was written three years ago.

Chart 1

YEN RALLY IS BOOSTING JAPAN ISHARES... Today's U.S. April jobs report was the weakest in seven months. That pushed the dollar even lower against most foreign currencies. The dollar's biggest drop (-1%) came against the Japanese yen. Chart 2 shows the yen having cleared its 2006 high to turn its trend higher. That's giving a boost to Japan iShares (EWJ) and has helped make it one of the day's strongest foreign ETFs. Although the Japanese stock market has been closed for most of the week on holiday, that hasn't prevented the EWJ from reaching a new multi-year high. The black line in Chart 3 is the EWJ. The orange line is a ratio of the EWJ divided by the S&P 500. That too has been rising. Not only are the Japanese iShares rising, but they're rising faster than the S&P 500. That's primarily due to the rising yen (and falling dollar). A falling dollar makes foreign investments more profitable to American investors. Since foreign ETFs are quoted in dollars, a falling dollar makes them rise even faster. Which brings us back to the earlier question of what's pushing gold prices higher. One thing is of course the falling dollar. In my opinion, an even bigger factor is new leadership coming from the Japanese market, which is shifting the world's economy away from a deflationary one to a more inflationary one. That also explains the close correlation between rising Japanese shares and the price of gold.

Chart 2

Chart 3

JAPAN ISHARES AND GOLD ARE RISING TOGETHER ... I've shown this chart before but it's worth showing again. Chart 4 is a comparison of the price of gold (black bars) to Japanese iShares (orange line) over the last three years. The two lines show a remarkably close correlation. The area inside the blue box shows them peaking together in March 2004 and trading sideways together until late summer 2005 when they resumed their uptrends together. The two circles at the start of 2006 show them consolidating together for a few weeks before turning back up again. Chart 5 provides a more compelling long-term argument for the linkage between gold and Japan. The solid black line is the price of gold. The orange line is a ratio of the EWJ divided by the S&P 500. It tells how the EWJ did relative to the U.S. market. After underperforming the U.S. throughout the 1990's (partially due to Japanese deflation) the ratio line bottomed in early 2002 (first arrow). It hit a second bottom in the spring of 2003 (second arrow). Notice that both signs of relative strength in Japan accompanied major upturns in gold. The ratio bottomed again in mid-2005 (third arrow) as Japan emerged as the developed world's strongest stock market. That helped launch another major rally in gold. Part of the EWJ strength was tied to the falling dollar which helped gold. The bigger point, however, is that Japan's new upside leadership signaled a paradigm shift toward a more global inflationary environment. That's bullish for gold. That paradigm shift also explains why global bond yields have started rising. Chart 6 shows the close correlation between the same EWJ:SPX ratio (orange line) and the 10-year T-note yield (green line) over the same nine years. Both lines hit major bottoms in 2003. And both have just exceeded their 2004 highs. That also seems to support the idea that a rising Japan has a lot to do with rising global bond yields. In other words, Japan's strength is good for gold, but bad for bonds. It also makes Japan one of the world's best stock values.

Chart 4

Chart 5

Chart 6

WHY JAPAN IS STILL A GLOBAL VALUE ... The next chart shows why I believe Japan to be one of the best global values. While most other global markets are at or near record highs, the Nikkei 225 has recovered barely a third of its losses from 1990 to 2003. The Nikkei is still down 55% from its 1990 peak at 39,000. During that same time span, the S&P 500 has risen over 300%. What I also like about Japan is that it's been poorly correlated with other global markets over the last fifteen years. That makes it an excellent global diversification vehicle. This isn't a new view. Those of you who have followed by writing know that I was saying the same thing last summer when the Nikkei was just breaking out of a base at 12K. There is a short-term warning, however, that you should know about. The chart of the Nikkei shows the next upside resistance barrier at its early 2000 peak just over 20K. That's still 18% away from current prices. Chart 8, however, shows that resistance level to be 16.03 in the the Japan iShares (EWJ). Today's trade at 15.39 puts the EWJ within 4% of that resistance barrier. While I remain bullish on Japan, you should know that the EWJ may run into some interim resistance around that 16.00 level.

Chart 7

Chart 8