Correlation of Japanese Yen with Gold

Gold Yen Correlation

Conventional wisdom has been abuzz lately about the Gold Yen Correlation. The two charts below are courtesy of my friend James Cutting of Nautilus Capital. Indeed, on the basis of a 63-day Gold Yen Correlation (I have no idea how James determines these time periods) there is presently a .85 correlation between the two markets. The second chart in this series shows that since 2013 there has been a fairly consistent correlation of at least .50 between the markets.

My experience since the mid-1970s is that these correlations come and they go. The chart of the 52-week Yen Gold Correlation dating back to 1990 shows several brief periods when the two markets were negatively correlated. My guess is that this period of .80 Yen Gold Correlation will not last – and that a negative correlation will once again emerge, even if for very brief periods such as been the historical case.

As a trader I actually pay very little attention to correlations that become conventional wisdom. There is a simple reason for my lack of interest in such phenomena – I cannot enter a Gold order in the spot Yen market and I cannot enter a Yen order at the Comex.

There is yet another point I want to make about the relationship of Yen and Gold. For a moment pretend you were a Japanese investor who became convinced 15 years ago that your home currency would become and remain highly correlated with Gold. A logical conclusion of this thought would have been that your assets would perform equally well sitting in Yen or invested in Gold. Yet, as shown on the quarterly chart of Gold priced in Yen, Gold has appreciated four- fold against the Yen since 2000. That is hardly what I would define as “high correlation.”

Frankly, I am highly skeptical of a causal relationship between Gold and Yen prices. Rather, I simply think that Gold priced in Yen is in a broad trading range, as shown both on the quarterly and weekly chart. The current Gold Yen Correlation is coincidental, not causal.

When I first entered the trading business the conventional wisdom was the high correlation between Wheat and Gold prices. I can also recall an extended period of time with a near 1.00 correlation between NFC teams winning the Super Bowl and advances in the U.S. stock market. The current Yen Gold Correlation will end up in the same scrap heap of history.

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