As we all know, Gold and Silver have been viewed as a form of currency since the beginning of time. Ancient civilizations used gold, silver and other metals as currency because they didn't want a government to simply print an endless amount of paper money. Many people in modern times think that the ancients just didn’t realize paper money was easier to use, but that's not the case. The ancients were smart and understood mathematics better than any other subject.
Many in the financial media are now quite bearish on gold, silver and other precious metals. After all, gold topped out in September 2011 at $1923.70 an ounce, which is when J P Morgan Chase (NYSE:JPM) upgraded gold to $2500 an ounce. Unfortunately, a week after the upgrade, gold began to decline and has been selling off ever since JPM's call.
So when will it start to rally again?
Watch The Yen
Well, it seems that gold has been declining as the US Dollar Index has strengthened and the Japanese Yen has fallen. And that tells us that traders should watch for gold to rally when the USD/JPY starts to fall. According to the Commitment of Traders Report, over the past six months the commercial money has been increasing their net-long position in the Yen. Which tells us that they're betting the USD/JPY will eventually fall.
On the chart below, you can easily see that the SPDR Gold Trust (ARCA:GLD) is trading inversely to the USD/JPY. Note that GLD is the thick black line and the USD/JPY is the green and red candlestick bars. Should this chart correlation remain intact, it is indicating that when the USD/JPY declines, gold will start to trade sharply higher. Everyone is now watching the efforts of the Bank of Japan as they attempt to devalue the currency. Unfortunately for the Japanese, their economy is still struggling as debt mounts. The Bank's goal is to try and create inflation while blocking deflation. But once and if inflation ever starts, it should only help to boost gold.
And that's the first clue we should watch for as an indication as to when gold will start to turn sharply higher again.