Gold and Yen

Why Gold and Yen are sending important signals to markets?

In the last one month we saw a sharp appreciation in the price of gold and the Yen. A 4% appreciation in these safe haven assets in a month is not regular. But more importantly, it is the mix of Yen and gold that is portentous.

Gold crosses $1300/oz mark

Gold has been an inverse proxy for Dollar, which is why gold was tepid over the last two years when the dollar was on a run. Two things changed quietly for gold in the last couple of months. Firstly, the dollar started sending weak signals on expectations of slower growth. That was later ratified by the weak manufacturing numbers and the sluggish outlook given by Apple. Secondly, it is expected that Trump’s pressure on Jerome Powell should prevail in 2019. Even if Powell does not really cut rates, he may at least support the financial markets by maintaining status quo on rates. That is what the Fed Watch is indicating. That is also not great news for the dollar. Gold is hinting at financial volatility.

The Yen, which is normally a tepid currency, had been gaining ground gradually. It became apparent only when the flash crash happened in the Yen/AUD trade. In fact, the Yen has appreciated more than 4% against the USD in the last 1 month. Its appreciation against other currencies is much higher. Why this sudden demand for the Japanese Yen. Firstly, Japan has traditionally run a current account surplus. That means in times of economic turmoil, the Yen is best poised to hold value. Secondly, Yen has been among the preferred alternatives for traders and central banks who are worried about the volatility of other hard currencies. There is one irony in the entire argument, which is hard to miss. Back in 1998 and 2008, a sharp rally in gold and Yen combined. In both the cases, it was a precursor to tumultuous financial crisis. One only hopes that this time is different. A financial crisis is the last thing the world economy needs!

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