Secular Shift Update: Yen and Gold

Back in October 2021 I posted Secular Change Signal: Yen and Gold.

The yen (JPYUSD) and gold have been positively correlated. Gold broke higher in 2019 and into the March 2020 peak, but the correlation came back. In a yen breakdown scenario, there should be another divergence as in 2019. Gold could follow the yen lower for a variety of reasons. A "good" inflation scenario with strong global growth or a deflationary wave would both weigh on gold. They could both rise in a dollar breakdown scenario. As I laid out in yesterday's post, I am looking for a yen bear market. That would be secular change from the past forty-plus years and with that should come a break in yen and gold.

That link to the yen post is a big one I did on the yen: Japanese Yen Hits Pandemic Low vs Dollar, Has a Bear Market Begun? The conclusion:

Beyond a short-term forecast, the context of a rising USDJPY will matter. If there's a stable, inflationary global growth cycle, then it probably peaks long before it destabilizes world markets or at least it takes years to reach that point. I would expect USDJPY would clear 125, but fall short of 165 in this scenario. If there's stagflation, that's a break with 40-years of global economic history. Energy and food importing Japan would be in trouble. If the U.S. stock market goes into a bear market and USDJPY falls like before, then maybe the global economy is still trapped in post-2008 conditions. If instead the DXY rises in a stock bear market, but the yen keeps falling, that is a break with 20-years of history. The major trendlines shown above can be interpreted as the dividing line between past and future. As long as they're intact, we can look to the past for guidance. If they break, the future has arrived and with it will come major changes in global economic arrangements.

The big picture is long-term secular trends that last for decades. It's still too soon to say that the relationship has broken, but the yen has broken both a 40-year and 20-year resistance line. Here is the updated comparison of USD/JPY versus SPY/GLD:

Stocks have started underperforming gold, which puts me on alter for a secular change in inflation.

Gold and copper is still indecisive. Gold-copper could rise in either a deflation or a stagflationary recession scenario.

The 10-year yield is testing a 40-year trendline.

Back to the yen, it's breakout is visible across assets, from CNY to the Euro to gold.

The window for a major secular shift in markets is open and at the same time, a major reversal. As the chart above says, the bond market is at the game over line for the Federal Reserve. If rates and inflation keep rising, the Fed cannot bailout the stock market anymore. Rates and inflation will still be high during a bear market, tying the Fed's hands. This is the Fed's moment to push markets back into the 2008-2021 trap or lose control of the stock market at least.

Markets also cannot continue moving in the same direction without triggering knock-on events. There will be natural pushback as various economic relationships reaches breaking points. Going back decades, prior break points were met with reversals. The yen crash comes right before the Federal Reserve hikes rates to who knows what level and doubling its QT policy from Q4 2018 when stocks fell 20 percent. Which way will that force exert itself, with reversals or breaking more multi-decade relationships? 

With everyone suddenly putting their eyes on the yen, a reversal is possible. As is a reversal in bonds. My highest conviction is that volatility will rise and equities will fall because I see those outcomes as highly probable no matter which way bonds and currencies go, but that is for the months ahead, not days.