1. When looking at Gold vs Yen or XAUJPY it becomes apparent why Gold is lagging the broad safe haven losses that we have seen during this risk-recovery rally - investors are buying gold over Yen - so gold appears to be their preferred safe have asset to hold in a risk-on rally - likely a function of perceived future weakness of Yen? BOJ/ JPY Govt stimulus?
- This may be the case for three reasons; 1) Investors speculate JPY is due further downside gains compared to gold ( Gold is the stronger Risk-off asset) and they speculate that BOJ may deliver a big devaluing package and/ or 2) They believe JPY is more overvalued than Gold so they sell their JPY holdings over their Yen. 3) Gold is more illiduid compared to Yen e.g. investors have been able to sell their Yen faster/ easier than their Gold as Gold is a physical asset and FX markets are the most liquid markets in the world - whereas Yen is pure currency which is convertible at any level.
1. This infers that investors expect Gold to continue to outperform in risk-off rallies going forward - which makes sense given Gold is already up 30% this year vs Yen's only 20% up - so they see further upside for Gold . This could be the case as the market discounts the probability that the BOJ/ JPY govt delivers a large easing package which devalues the JPY.
- Therefore Gold shorts should be careful during this risk-on rally as when the tides change back to the trend of risk-off, Gold is more likely to rally aggressively in comparison to Yen.
1. Buying Gold on the risk-on reversal (to risk-off) - we should allocate the liquidity to Gold over Yen to take advantage of this investor sentiment.
2. The market is clearly discounting quit aggressive JPY weakness when relatively compared to other safe havens - likely due to BOJ/ JPY Govt stimulus worries.
- Knowing this, we should potentially position for JPY shorts - since the market clearly is positioning for some serious JPY weakness relatively - a big BOJ package?
3. Whilst safe havens have outperformed risk by 14% (20% safe havens 6% risk-on assets - pre-brexit) - Gold has also outperformed Yen by 7%.
- Therefore in risk-off rallies we SHOULD expect Yen to underperform Gold e.g. GOLD should be brought over Yen.
- In risk-on rallies (now) we should expect Yen shorts to outperform Gold as Yen is considered the poorer asset - USDJPY longs are better/ safe than Gold shorts (hence supporting my long $yen view).
*Check the attached posts that also support the long $Yen view in this market*
Riskon riskoff move in weekly/ monthly cycles and describe the trends we see between risk assets and safe havens.. so there isnt actually a "rush" to spot the trend as such. e.g. my signal for this risk-on trend to be over, and to buy gold, is when gold has 2/3 up days or Yen breaks the 104 level and holds - one or both of these conditions signals to me that we are risk-off and that i should buy gold.