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The Yen-Gold Correlation: What Does It Mean? - SPDR Gold Trust ETF (NYSEAR... Page 1 sur 3
The Yen-Gold Correlation: What Does It Mean?
Dec. 18, 2016 9:08 AM ET7 comments
by: Long/Short Investments
Summary
• The yen and gold correlation has come to 0.92 over the past year and 0.94 over the past five years.
• The close association is largely a consequence of their mutual status as “safe haven” assets, or competing
alternatives when US macroeconomic prospects are subpar and capital outflows ensue.
• This correlation could nonetheless deteriorate at any point given the lack of direct economic reasons why such an
interdependence should exist.
• With bullish US prospects, gold and the yen become less attractive assets.
• I also provide a brief rundown of how future US trade policy is influencing the price of the dollar.
Thesis
The continued strength of the US dollar versus the yen will likely continue with the current bullish prospects on the US
economy running contrary to the ongoing stagnancy of the Japanese economy and its perpetually ineffective monetary
and fiscal policy initiatives. Optimism with respect to the future state of the US economy from potential overdue fiscal
policy enactments also renders gold a less attractive asset relative to its position throughout the majority of 2016 when the
US economy was underperforming and the collective mood was last buoyant.
Overview
In 2016, gold (NYSEARCA:GLD) and the yen (NYSEARCA:FXY) have both correlated as "safe haven" assets. Earlier in
2016, when US economic data was weak, the US dollar (NYSEARCA:UUP)(NYSEARCA:UDN) weakened and gold
appreciated. This is the standard relationship, as gold appreciates on a negative US outlook and vice versa. The yen also
serves as one of the world's five reserve currencies and also became one of the beneficiaries of these safe haven
outflows from the US earlier in the year, causing the strong positive correlation between the yen and gold that's been
observed throughout 2016 and throughout the duration of the current decade.
However, one can never take these correlations for granted, as they sometimes break down. The yen/gold correlation will
ebb and flow in the future, as there's no real economic explanation why it should persist. Gold is a US-centric commodity,
acting as an alternative currency to protect against volatility, inflation, and otherwise insalubrious prospects in the greater
US economy. So the best explanation for the current strong correlation between the yen and gold is mainly based on the
"competing safe havens" explanation.
Over the past ten years, based on data collected at the daily interval, the correlation coefficient between the two has been
0.657. Over the past five, 0.941; and over the past year, 0.918.
http://seekingalpha.com/article/4031205-yen-gold-correlation-mean?app=1&auth_par... 19/12/2016
The Yen-Gold Correlation: What Does It Mean? - SPDR Gold Trust ETF (NYSEAR... Page 2 sur 3
(Source: data from Bloomberg, modeled by author)
The US dollar and gold share their well-known inverse relationship, given gold's pricing based on the macroeconomic
situation in the US. The correlation has risen to -0.63 and -0.57 over the past ten years.
What Will Cause the Correlation to Break Down?
Given that the yen and gold are far from fungible assets, and Japan is not a "commodity currency" in any form, it is
expected that the correlation will cease to function at times. Japan and the US would need to trade in opposite directions
from a capital flow perspective, or for inflation to meaningfully pick up in the US, for the correlation to begin receding. Yet,
there is nothing on the horizon to suggest that capital flows will migrate from Japan-based assets to US-based assets.
I am currently long the USD/JPY and have been since just above the 100 yen to the dollar mark, believing that Japan's
debt, growth, inflation, and overall macroeconomic situation will remain bleak. Accordingly, interest rates will remain low
and keep a lid on the value of the yen. Ultra-low rates won't work in reviving growth and inflation on their own, but a
foundation of easing is the only logical option for a such wretchedly stagnant economy. Japan's fiscal policy and
demographic situation are both unpromising as well.
Due to the post-US election increase in Treasury yields - based on expectations of higher inflation under policy agenda
items by the incoming administration, this has also widened the yield between Treasuries and Japanese government
bonds ("JGBs") by about 60 basis points. This has exacerbated capital outflows from Japan as investors chase higher
returns.
Accordingly, if the yen depreciates to the point where it the economic drawbacks (lower gross public and private business
investment, flatter/declining wage growth, increased cost of living) outweigh the positives (export growth, potential uptick
in inflation), the BOJ will probably work to tighten by increasing the 10-year yield up about 10 bps, from its currently
targeted 0.00% to 0.10%. If the BOJ can maintain a targeted rate on its 10-year that can essentially keep a fixed gap
between Treasuries and JGBs to help curb capital outflows and further pressure on the yen. For the time being, I believe
the BOJ is content to let the dollar appreciate against its currency up until perhaps the 125 yen per dollar mark, as it
enables exports to become more attractive on the international market (still a key component of growth) and helps inflation
through the effective rise in import prices.
The Case of Future US Trade Policy on the US Dollar
http://seekingalpha.com/article/4031205-yen-gold-correlation-mean?app=1&auth_par... 19/12/2016
The Yen-Gold Correlation: What Does It Mean? - SPDR Gold Trust ETF (NYSEAR... Page 3 sur 3
President-elect Donald Trump spent plenty of time talking about the issue of international trade on the campaign trail,
assuming what is traditionally more of a far-left approach on the issue by taking a more protectionist stance. To sum it up
in one sentence, Trump states that free-trade agreements (such as NAFTA or the prospective Trans-Pacific Partnership)
have adversely affected the US by sending jobs and goods production overseas, representing an uninhibited one-way
capital flight out of the country. A more protectionist policy bent to prevent capital migration out of the country would be a
positive event for the dollar.
Trump's general idea is to incentivize more domestic production through tax breaks to make it financially feasible for these
companies to maintain a greater proportion of their onshore operations. The higher cost of labor will be mostly passed off
by corporations, causing inflation to pick up. This will lead to higher interest rates and likely a stronger US dollar.
US exports will become more expensive to international buyers as the dollar rises and we could actually see higher trade
deficits, even with reworked trade agreements to make them more amenable to US economic interests. Whether this is
the most optimal solution is difficult to say. Offshoring production to the lowest-cost areas available might be what a freemarket mechanism might dictate, and generally free markets represent the most optimal and deadweight loss-limiting
policy approach for the global economy as a whole.
In the long-run, under a hypothetical 100% free trade world, as the cost of labor increases in emerging markets as they
develop, the value-add of offshoring production in a developing market versus an advanced economy will recede.
However, this argument likely won't hold water for hundreds of years, if ever. There are still numerous parts of the world
that have little in the way of economic development that will eventually be prime ground for establishing more economical
solutions to its manufacturing and other supporting operations. For example, it's always possible that in 100 years' time,
sub-Saharan Africa will be the manufacturing hub of the world for essentially the same labor costs currently being paid out
to those in southeast Asian markets.
As of 2015, US export volume currently accounts for 12.6% of GDP (world average is 29.5%). However, as a net importer,
the US could use its more valuable currency to acquire the same amount of goods for a cheaper price. Given the US is an
economy where 68.3% of its total GDP is made up of personal consumption expenditures, providing consumers with
higher purchasing power can largely be considered a good thing. Plus, Trump's policy is not necessarily to increase the
volume of US exports, but rather to make it fairer to US interests. If the aggregate US trade balance worsens but is offset
with higher consumption spending, this is a net benefit to the US economy.
Disclosure: I am/we are long USD/JPY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from
Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
http://seekingalpha.com/article/4031205-yen-gold-correlation-mean?app=1&auth_par... 19/12/2016
The Yen-Gold Correlation: What Does It Mean?
Dec. 18, 2016 9:08 AM ET7 comments
by: Long/Short Investments
Summary
• The yen and gold correlation has come to 0.92 over the past year and 0.94 over the past five years.
• The close association is largely a consequence of their mutual status as “safe haven” assets, or competing
alternatives when US macroeconomic prospects are subpar and capital outflows ensue.
• This correlation could nonetheless deteriorate at any point given the lack of direct economic reasons why such an
interdependence should exist.
• With bullish US prospects, gold and the yen become less attractive assets.
• I also provide a brief rundown of how future US trade policy is influencing the price of the dollar.
Thesis
The continued strength of the US dollar versus the yen will likely continue with the current bullish prospects on the US
economy running contrary to the ongoing stagnancy of the Japanese economy and its perpetually ineffective monetary
and fiscal policy initiatives. Optimism with respect to the future state of the US economy from potential overdue fiscal
policy enactments also renders gold a less attractive asset relative to its position throughout the majority of 2016 when the
US economy was underperforming and the collective mood was last buoyant.
Overview
In 2016, gold (NYSEARCA:GLD) and the yen (NYSEARCA:FXY) have both correlated as "safe haven" assets. Earlier in
2016, when US economic data was weak, the US dollar (NYSEARCA:UUP)(NYSEARCA:UDN) weakened and gold
appreciated. This is the standard relationship, as gold appreciates on a negative US outlook and vice versa. The yen also
serves as one of the world's five reserve currencies and also became one of the beneficiaries of these safe haven
outflows from the US earlier in the year, causing the strong positive correlation between the yen and gold that's been
observed throughout 2016 and throughout the duration of the current decade.
However, one can never take these correlations for granted, as they sometimes break down. The yen/gold correlation will
ebb and flow in the future, as there's no real economic explanation why it should persist. Gold is a US-centric commodity,
acting as an alternative currency to protect against volatility, inflation, and otherwise insalubrious prospects in the greater
US economy. So the best explanation for the current strong correlation between the yen and gold is mainly based on the
"competing safe havens" explanation.
Over the past ten years, based on data collected at the daily interval, the correlation coefficient between the two has been
0.657. Over the past five, 0.941; and over the past year, 0.918.
http://seekingalpha.com/article/4031205-yen-gold-correlation-mean?app=1&auth_par... 19/12/2016
The Yen-Gold Correlation: What Does It Mean? - SPDR Gold Trust ETF (NYSEAR... Page 2 sur 3
(Source: data from Bloomberg, modeled by author)
The US dollar and gold share their well-known inverse relationship, given gold's pricing based on the macroeconomic
situation in the US. The correlation has risen to -0.63 and -0.57 over the past ten years.
What Will Cause the Correlation to Break Down?
Given that the yen and gold are far from fungible assets, and Japan is not a "commodity currency" in any form, it is
expected that the correlation will cease to function at times. Japan and the US would need to trade in opposite directions
from a capital flow perspective, or for inflation to meaningfully pick up in the US, for the correlation to begin receding. Yet,
there is nothing on the horizon to suggest that capital flows will migrate from Japan-based assets to US-based assets.
I am currently long the USD/JPY and have been since just above the 100 yen to the dollar mark, believing that Japan's
debt, growth, inflation, and overall macroeconomic situation will remain bleak. Accordingly, interest rates will remain low
and keep a lid on the value of the yen. Ultra-low rates won't work in reviving growth and inflation on their own, but a
foundation of easing is the only logical option for a such wretchedly stagnant economy. Japan's fiscal policy and
demographic situation are both unpromising as well.
Due to the post-US election increase in Treasury yields - based on expectations of higher inflation under policy agenda
items by the incoming administration, this has also widened the yield between Treasuries and Japanese government
bonds ("JGBs") by about 60 basis points. This has exacerbated capital outflows from Japan as investors chase higher
returns.
Accordingly, if the yen depreciates to the point where it the economic drawbacks (lower gross public and private business
investment, flatter/declining wage growth, increased cost of living) outweigh the positives (export growth, potential uptick
in inflation), the BOJ will probably work to tighten by increasing the 10-year yield up about 10 bps, from its currently
targeted 0.00% to 0.10%. If the BOJ can maintain a targeted rate on its 10-year that can essentially keep a fixed gap
between Treasuries and JGBs to help curb capital outflows and further pressure on the yen. For the time being, I believe
the BOJ is content to let the dollar appreciate against its currency up until perhaps the 125 yen per dollar mark, as it
enables exports to become more attractive on the international market (still a key component of growth) and helps inflation
through the effective rise in import prices.
The Case of Future US Trade Policy on the US Dollar
http://seekingalpha.com/article/4031205-yen-gold-correlation-mean?app=1&auth_par... 19/12/2016
The Yen-Gold Correlation: What Does It Mean? - SPDR Gold Trust ETF (NYSEAR... Page 3 sur 3
President-elect Donald Trump spent plenty of time talking about the issue of international trade on the campaign trail,
assuming what is traditionally more of a far-left approach on the issue by taking a more protectionist stance. To sum it up
in one sentence, Trump states that free-trade agreements (such as NAFTA or the prospective Trans-Pacific Partnership)
have adversely affected the US by sending jobs and goods production overseas, representing an uninhibited one-way
capital flight out of the country. A more protectionist policy bent to prevent capital migration out of the country would be a
positive event for the dollar.
Trump's general idea is to incentivize more domestic production through tax breaks to make it financially feasible for these
companies to maintain a greater proportion of their onshore operations. The higher cost of labor will be mostly passed off
by corporations, causing inflation to pick up. This will lead to higher interest rates and likely a stronger US dollar.
US exports will become more expensive to international buyers as the dollar rises and we could actually see higher trade
deficits, even with reworked trade agreements to make them more amenable to US economic interests. Whether this is
the most optimal solution is difficult to say. Offshoring production to the lowest-cost areas available might be what a freemarket mechanism might dictate, and generally free markets represent the most optimal and deadweight loss-limiting
policy approach for the global economy as a whole.
In the long-run, under a hypothetical 100% free trade world, as the cost of labor increases in emerging markets as they
develop, the value-add of offshoring production in a developing market versus an advanced economy will recede.
However, this argument likely won't hold water for hundreds of years, if ever. There are still numerous parts of the world
that have little in the way of economic development that will eventually be prime ground for establishing more economical
solutions to its manufacturing and other supporting operations. For example, it's always possible that in 100 years' time,
sub-Saharan Africa will be the manufacturing hub of the world for essentially the same labor costs currently being paid out
to those in southeast Asian markets.
As of 2015, US export volume currently accounts for 12.6% of GDP (world average is 29.5%). However, as a net importer,
the US could use its more valuable currency to acquire the same amount of goods for a cheaper price. Given the US is an
economy where 68.3% of its total GDP is made up of personal consumption expenditures, providing consumers with
higher purchasing power can largely be considered a good thing. Plus, Trump's policy is not necessarily to increase the
volume of US exports, but rather to make it fairer to US interests. If the aggregate US trade balance worsens but is offset
with higher consumption spending, this is a net benefit to the US economy.
Disclosure: I am/we are long USD/JPY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from
Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
http://seekingalpha.com/article/4031205-yen-gold-correlation-mean?app=1&auth_par... 19/12/2016