Gold is one of the favorite trading instruments in the precious metals asset class. Its appeal ranges from the intraday trader/speculator to investors involved in actual purchasing of the bullion. Well known for its status as a safe haven currency, some liken gold to the default currency for mankind.
It is no wonder then that gold attracts a lot of attention, from fundamental analysis to the more technical trading strategies with gold. This is largely because gold can be traded in many ways such as spot gold (XAU/USD), gold futures (GC), gold ETF's (GLD), and even gold (miner) stocks such as Barrick Gold Corp. (ABX) or Goldcorp Inc. (GG).
Gold and the yen correlation
Not known to many traders, gold is positively correlated to yen. Let's take a look at the first chart where we compare yen futures to gold futures on a monthly time frame. You can see how gold's peaks and troughs correspond to that of the yen's peaks and troughs.
Gold – Yen Futures Monthly Chart
Note: Yen futures are contracts that are priced in US dollars. It is the inverse of USD/JPY.
The above chart also shows that the correlation is not 100%. Or in other words the percentage to percentage move or a point – pip basis between gold and yen are not exact. Still, there is exists a level of correlation that cannot be ignored. You can also see that the level of correlation changes over time.
The next image below shows a 30-day correlation between USD/JPY and XAU/USD. Notice the -91.8% correlation, meaning that gold and USDJPY tend to move inversely or in opposite directions.
XAUUSD/USDJPY Correlation (30 days)
Why is gold correlated to yen?
In reality, there is no proper explanation to this. Although the fact that gold and yen both share the status as a safe haven does in a way validates this correlation. But it is merely scratching the surface. Correlations in the markets come and go. A more recent example that traders can recollect was the short term correlation between oil prices and stocks in the first half of the year, which soon faded. This brings an important point to mention, which is that with any correlation you cannot take it for granted. Therefore traders need to constantly, and at regular intervals check on the correlation between gold and yen. For example, Gold and USD/JPY have a -94% correlation on a weekly basis. However, this fluctuates and therefore traders should always keep an eye out on any significant changes.
