(Kitco News) – The correlation between the Japanese Yen and the price of gold is back, and a rising yen could be very positive for the yellow metal, according to Market Analyst Konstantin Oldenburger at CMC Markets.
“Last Thursday, the Bank of Japan may have intervened in the currency market to support the battered yen,” Oldenburger wrote. “This kind of intervention could be made easier in future with a possible change in US monetary policy from the Federal Reserve.”
Oldenburger said that U.S. equities in particular benefit during periods of rising or high interest rates, because liquidity returns to the USD. “When interest rates fall, this liquidity flows out of the dollar and moves into alternative investment opportunities worldwide,” he said. “The yen could now benefit from this redistribution.”
Following the release of U.S. CPI for June last Thursday, USD/JPY fell by over 2%, with rumors circulating that Japan’s Ministry of Finance had intervened.
“If last week's trends – driven by lower CPI and expectations of a Fed rate cut – continue, the yen could rise with gold prices towards all-time highs,” Oldenburger said.
“Hedge funds currently hold few long yen positions; only short positions that need to be covered in the event of a short squeeze,” the analyst added. “If the yen continues rising, hedge funds could face increased pressure to reduce their positions. Historically, a strong yen has positively correlated with gold, suggesting gold could also benefit.”
Oldenburger noted that gold has consolidated between $2,431 and $2,290 per ounce over the last three months. “Since early July, investors have attempted to break above this range, which could push prices towards $2,700,” he said. “Conversely, if gold falls below $2,290, it may correct further to $2,220 and $2,189.”
