For gold investors, the major thorn in our side continues to be the USD/JPY, so we need to discuss it again.
Over the past weekend at TFMR, we had a discussion about how so many well-intentioned people could have been so wrong about "the metals" over the past five years. It included this sentence: "What we failed to predict was the successful, collective manipulation of nearly all "markets" by the CBs, their primary dealers and their willing/sycophant media through HFT."
That one sentence could be the subject of a full post or podcast but, for now, let's just focus upon the market manipulation through HFT. As you know by now, the USD/JPY is just about the single most important general input for HFT buy/sell decisions. Whether it's S&P futures, bond futures or Comex Gold, the direction of the USD/JPY generally impacts all of these "markets" more than anything else. The chart below plots the inverse of USD/JPY (JPY/USD) with gold futures. Note clear correlation that began in 2008.
In observing the central bank market manipulation...when we see the same pattern again and again...and this pattern is followed by the desired equity or bond market reaction...then you know something is up. How many times have we captured screenshots of the BoJ, Fed, SNB or whomever buying the USD/JPY in size at just the right moment to create and paint a double bottom on the chart? From there, how many times have we watched a near perfect and uninterrupted, 45-degree angle recovery ensue?
Here are just a couple of egregious examples that I just chose at random from my desktop folder that holds about 40 charts. (I've only been keeping them since late summer.)
Well, since we just used the term "egregious", let's apply it again to the charts below. Recall that things were sailing along surprisingly well last Monday. Over the previous week, the USD/JPY had failed to hold support near 113 and again near 112 and it had fallen to near and just below the very-important 111 level. Then, as we chronicled that day, a sudden spike occurred on NO NEWS and not even any rumors. Just a spike from out of the blue that drove the pair immediately back above 111.
And what followed over the next five days? Well, outside of the sudden plunge on the now disproven stories from Brian Ross at ABC News, the USD/JPY has followed the same glide path all the way back to 113. Also, IT'S VERY IMPORTANT TO NOTE where USD/JPY reopened Sunday afternoon...RIGHT ON the glidepath. Remove the reaction to Friday's unexpected headlines and it's a near-perfect, 45-degree angle for nearly FIVE FULL DAYS.
(And in case you're wondering which tail wags which dog, note the turn in USD/JPY last Monday clearly preceded the turn in the S&P 500.)
How is this even possible? It's not...well, at least not in the traditional and "free market" sense...the pre-2008 and pre-2012 sense. All of these things used to move somewhat independently as human, carbon-based traders made rational investment decisions based upon a number of inputs. However, in 2017, where 90% of all trading is now done through HFT....well, the results are pretty clear. The Central Banks and their Primary Dealer trading desks manipulate the key inputs and HFT does the rest. This is why yours truly and so many other "experts and mavens" have been confounded for the past five years. It's not nefarious intent and it's not because gold bugs are cruel, heartless charlatans who are intent upon stealing as many dollars as possible from the easily-duped. Instead, it is a failure to anticipate the levels to which The Central Banks would successfully go to keep their system alive.
Understanding this is why you consistently hear me cite the refrain of PHYSICAL DEMAND. It is only through a renewed crisis of confidence that this system can be broken...at least as it pertains to the precious metals. Physical demand will bust The Bullion Banks by breaking their just-in-time and unallocated delivery system. Physical demand will force price to be discovered through the exchange of physical metal, not the alcehmized digital garbage that permeates the system today.