It is now a given fact that the United States government, as well as the central banks, manipulate gold pricing going back at least as far as when President Richard Nixon removed the dollar from the gold window. But what many may not realize is that the reasons for rigging the gold markets have changed periodically over the past 45 years.
In recent times, and in particular since the 1990's, Wall Street has used the Japanese Yen as a tool for creating vast profits through a mechanism known as the Yen carry trade. This trade is done by using dollars to purchase the much weaker Japanese currency, then using that money to buy Treasury Bonds at a larger discount.
Japan of course has been most helpful in facilitating this trade by the fact that they have kept their interest rates down near zero for almost 25 years at the same time the dollar has remained strong minus the period following the 2008 financial crisis. But missing from this well known financial mechanism is how gold fits into it, and how the price of the precious metal needs to be rigged to ensure the carry trade continues at full capacity.
As you can see in this chart going back to 2012 when the Fed began to implement Zirp and QE, the price of gold has run nearly perfect with the actions of the USD/JPY currency trade. And this barometer is almost flawless to utilize for gold traders as when the Yen strengthens against the dollar, gold prices rise, and when it weakens, gold prices fall.
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.
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 USDJPY have a -94% correlation on a weekly basis. However, this fluctuates and therefore traders should always keep an eye out on any significant changes. - Orbex
What is the carry trade? It’s the borrowing of a currency in a low interest rate country, converting it to a currency in a higher interest rate country and investing it in the highest rated bonds of that country. The big trading outfits do this with leverage of 100 or 300 to one. This causes important moves in the financial markets, made possible by the trillions of dollars of central bank money creation. - Forbes