Thoughts on Japan, the US Dollar and Gold

I sure do hope these guys in Japan get a clue that they need to knock it off - stop the madness on the currency devaluation experiment- and get a hold of what is happening in reality before they blow themselves up.

Yes, I'm talking about their insane idea of more than doubling their printing of Yen, causing their stock market to rocket higher some ungodly percentage in a matter of weeks, and causing their bond market to repeatedly crash, tempered by numerous trading halts as more investors want to sell than buy. 

This whole scheme has come about due to a change at the top of the Bank of Japan with the dismissal of Shirakawa on March 19 and his replacement as Governor of the BoJ Haruhiko Kuroda.

On April 4th Kuroda’s new policies were announced and that is when the problems in the Japanese bond market began. Searching through one report after another it appears to me that since that date the Japanese bond market has been halted - due to circuit breakers kicking in because there are not enough buy orders to match up with the sell orders - at least 10 times, and as recently as this past Friday. These unusually large moves have elicited some comparisons to the market action of the late 1980's, before the bursting of Japan's economic bubble.

This really looks like it is going to end very badly.

You have the Bank of Japan BUYING its government bonds with its make-believe money and on face value why should that have the unintended consequence of owners of the same bonds selling in mass? Intuitively one would think that if the Central Bank is providing ammunition to support the price of your investment (bond), what could be better?

And for the first few hours of trade following this incredible announcement of policy change, Japanese bonds actually traded higher. After that, I think quite a few light bulbs lit up and bond investors started running for the door. And they are still running for the door as of last week.

Why?

Well for starters, would you want to hold an investment that pays .5% per year when you see your stock market rising that much EVERY HOUR? And since your currency is going to be severely devalued, do you really want to be paid back with DEVALUED Yen at .5% per year?

And if your Central Bank has announced an all-out war to get the inflation rate up to 2%, no doubt the rise in inflation will cause interest rates to rise and how will your already extremely broke government pay you back on your bond (debt) investment if its costs to borrow rise?

Everyone knows that Japan uses 25% of its tax revenue just to pay the interest on its debt. How will things work out if they have to use 50% or more of their tax revenue (due to a rise in interest rates) to service their debt?

Anyway, some of the excitement this past week was the 'accomplishment' of the USD/JPY (dollar/yen) rate cracking higher than 100. Early Friday morning this feat was given as the reason for gold's sharp sell-off. Then the Fed floated some trail balloon nonsense that it had new plans to begin slowing down the QE here and there. Even with all this going on, gold still managed to reverse direction and close strongly. Silver even completed a positive reversal.

Let's get to some charts. I have prepared 5. We'll begin with the USD/JPY weekly chart on the 20 year time frame. Next we'll look at the US Dollar Index (DX) weekly chart on the 10 year time frame. Then we'll move along to check out gold's (GC) secular bull market parabola situation with a weekly chart followed by a close up of a daily chart, and conclude with gold's daily chart featuring Fibonacci and daily cycle observations.

Here is the infamous USD/JPY that has everyone so excited.

Click on any chart to ENLARGE

That is quite a run the Japanese Yen has had lately vs. US Dollar. The media is fixated on the 100 level because, well, its an easy number to talk about. It's 100!

But what is just above 100 at, oh say about, 101.75? Yes, a blue line that runs left to right about 20 years. The line was support for at least 10 years and has been resistance since 2008. Good luck getting much higher on the first attempt. I'm not saying it cannot be done, especially the way the nuts are on the loose at the Central Banks. But I am skeptical.

Now let's see the US Dollar (DX) and it recent 3 year cycles.

I really thought the US Dollar was showing signs that it was finally ready to drop dead, but I got that wrong, didn't I? Anyway, I do find it interesting to see that these 3 year dollar cycles seem to find a way to top in a rather classical manner - a head & shoulders, a double top and if things go according to plan, another double top.

Some time ago I took a shot at figuring out the scheme of gold's parabola in terms of the increased steepening of 3 line segments. I redid that exercise today and got a slightly different result, but surprisingly found 3 line segments still define the parabola so far. I am guessing that this time I used a weekly chart on log scale and I probably used a daily chart on log scale last time. Anyway, here is what I found.

The three line segments are colored magenta, blue and red. The third line segment (red) connects the weekly low in 2005 with the weekly low in 2008 - then the line is just continued upwards and to the right.

Wait til you see where the red line travels at our recent low!

Talk about cutting it close. That red line is $5 above the low, if that. I put this final low on the 5 min time as I was curious what it would look like. Every single bar for 55 minutes was just above and below that line. Like the final war was being waged, then it was over (the bulls won, obviously).

Last, but not least, our daily chart of gold.

The dashed purple trend line is the daily cycle trend line which is ALWAYS broken before a new daily cycle can begin. We got that behind us on Friday. The daily cycle top occurred on Day 13 making it a bullishly right translation. The Fibonacci retracement managed to slightly dip below a very mild 38.2% retracement. We have completed day 18 and though on the short side of the average 24 days, it works. 

Also, gold achieved a Blees rating of 100 again this past week - 3 weeks in a row. Silver had a blees rating of 95. The managed money crowd pushed their luck even further last week by taking off long contracts and adding to their ridiculously historic short position. 

A top in the dollar should give us show time. And I can't wait to see it for myself!

Best always,

John
tsiTrader@gmail.com