Borrowing a Sentiment Tool From the Yen To Use With Gold

The price of gold and the Japanese yen are fellow-travelers, correlating very strongly most of the time.  Occasionally they disagree, and when they do that can be useful information. 

Because of this relationship, a sentiment indication that is useful for the yen can also be useful for gold prices.  This week’s chart shows data from the weekly Commitment of Traders (COT) Report, published every Friday by the CFTC.  It depicts the net position held by the group of traders known as the “commercial” traders, who are the big money and usually the smart money. 

Right now, this group is net long the yen in a big huge way, meaning that they are betting on the yen going up in value versus the dollar.  We can also see that when these commercial traders are net long the yen futures in a big way like this, that tends to be a bullish condition for gold prices in the weeks that follow. 

This principle did not work, however, during the period from late 2012 to 2016.  Prime Minister Shinzo Abe took office in December 2012 and immediately implemented a series steps toward monetary easing, fiscal stimulus, and reforms of the banking system that came to be known as “Abenomics”.  That disrupted the message of the COT data for the Japanese yen for a while, and thus the usage for gold prices.  As that period wound down, the relationship gradually started working again, and it is showing a good correlation now.  The message of the big commercial net long position in the yen is that gold should move higher.

We can use another currency for this same purpose.  The Swiss franc also shows a very strong correlation to the dollar price of gold, and so its COT Report data can be used in the same way as the yen’s, as a sentiment proxy for gold prices.

Here too, the commercial traders are net long the Swiss franc in a big way, and that tends to be a bullish message for gold prices.

I follow COT Report data on several different futures contracts, and provide updates about the relevant ones each Friday in my Daily Edition.  You can see samples and get more information about subscribing at https://www.mcoscillator.com/market_reports/.