Is Japan Simply Pegging the Yen to Gold?

• Posted by Greg Harmon
• on November 12th, 2014

In 2014 Ben Bernanke passed the baton to Janet Yellen to head the Federal Reserve. Mrs. Yellen was seen as an extension of the Bernanke era, continuing the unwind of stimulus but in a dovish manner. What may have been the more important had off though for Equity markets was the passing of the Quantitative Easing baton from the Fed to the Bank of Japan recently. More easy money in a low interest rate environment always the carry trade to continue and global investors to take risk in equity markets. You have seen the result as prices of equities (outside of Europe and their recent troubles) globally continue to rise.

What has been interesting over this time period though is that the resulting large move in the Yen has been mirrored by the move in Gold. Despite the Yen moving more than 10% since the beginning of August the chart above shows that the ratio of Gold to the Yen has remained in a very tight range. In fact that ratio was pretty constant for the 5 months prior to August as well with one quick undershoot. It almost seems like the Bank of Japan has been pegging the Yen to Gold prices. Maybe it is just a coincidence but this happens to be when the Ukrainian conflict started to heat up.

The broad macro policy and fundamental reasons can be debated by others. I will stick to the price action. And regardless of the cause, the pair has been very steady. If there is a causal relationship then it is worth watching both pieces for any signs of a change of course. It may be reflected in the other.

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