Algos & Gold: It’s All About That Yen

by T. Ferguson, TFMetalsReport, Silver Doctors.com: 

As the first quarter of 2015 draws to a close, let’s take inventory of where we stand and then let’s see if we notice anything interesting.

Not really sure where to start so, as MrsF likes to say, we’ll take things “in no random order”:

                         12/31/14 close                Last                  YTD% change

GOLD                      $1184                           $1188                         +0.34%

SILVER                   $15.60                         $16.76                        +7.44%

CRUDE                   $53.27                         $48.42                        -9.10%

LONG BOND          2.75%                          2.55%                         +7.27%

10-YEAR NOTE     2.17%                           1.95%                         +10.14%

POSX                        90.27                           98.51                          +9.13%

EURO                      1.2096                         1.0737                         -11.24%

YEN                          0.8345                        0.8329                        -0.19%

S&P 500                 2058.90                       2079.75                      +1.01%

OK, I admit it. I tricked you. Those numbers are not in “no random order”. Instead, notice the three items where I’ve bolded the % return numbers. Hmmm. No why would I do that? Could it be this be another exercise where Turd explains how the algos run everything?

YES! It’s exactly that!

As has been documented here ad nauseam, the price of gold is now largely determined solely by fluctuations in the yen. The yen goes down, gold goes down. The yen goes up, gold goes up. Put more specifically…the dominating computer-driven algo trade is long the USDJPY and short gold. The easiest way to show this is by inverting the USDJPY chart and plotting it overlaid with gold. When you do this, you get the chart below…and it’s a fair chart with the vertical axes nearly identical in % change:

On a much larger scale, The Banks and hedge funds are also running a paired trade of the yen and the S&P. The chart below shows the USDJPY directly overlaid with the S&P 500. Again, it’s a fair chart as the changes in the vertical axes is nearly identical:

So, if you’re baffled why “fundamentals don’t seem to matter”, it’s because the fundamentals don’t matter. There are very few human traders of size left and the computers control everything. In this environment, arcane notions such as supply/demand and company fundamentals are insignificant. The primary driver to these “markets” are changes to the USDJPY. Control that and you control everything else. With this in mind, is it any wonder why The Fed…hell-bent on driving the US stock market as high as possible to enhance the “wealth effect”…continues to give impetus to the dollar bid by jawboning about higher rates? If you and I can figure this out, you know that Mother Fellen and her Goons have figured it out, too. Talk the dollar higher and let The Machines do the rest. And lest you think that this is just a temporary phenomenon, feast your eyes on the 3-year charts below. Yen–gold on the left and yen–SP on the right:

Of course, like anything else, this “strategy” will work until it doesn’t. Just as one day, whether through a Black Swan event or just a snowballing global liquidation, equity fundamentals will re-assert themselves…one day, too, the paper gold market will be driven low enough that the suppliers of physical metal will be unable to clear all of their trades. This exact situation nearly broke the “market” for gold in early November of last year. London GOFO rates plunged to record low levels and, as you can see on the chart below, it was the one time where the yen–gold trading pair failed:

Though this trade has since re-asserted itself, it’s no accident or coincidence that the paper gold “market” once again found a bottom two weeks ago near $1150. In the end, anyone worried about a renewed drop in gold should only be concerned with two things:

1. Can the Bullion Banks find a steady supply of readily-deliberable physical gold at prices below $1150? Back in November, they could not and the physical market drove a rebound in the paper price.
2. Is the yen going to make even deeper lows? As you can see on the long-term USDJPY chart below, the area just north of 120 is pretty stout resistance and without the yen making new lows, there’s no impetus for The Machines to further sell gold.

So, the next time you read the doom-and-gloom predictions of some chart-reader or snake-oil salesman, please simply ignore them. Until the current system breaks, price will continue to be determined solely by changes in the USDJPY and the availability of physical gold to clear trades. At present, nothing else matters.

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