This week is slated to be a down week for Gold and the Euro, according to the sentiment discounting indicator. Both $FXE and $GLD are trading at a premium, and there's enough reason to believe that these two financial instruments have had enough of a rallying cry for the past couple weeks. Expect some steam to come off both for the week ending January 19.

In one of the previous articles, there was a correlation matrix showing how much of a correlation Gold has with the Japanese Yen, soon after the posting, there was a big move for the Japanese Yen against the US Dollar. There's two thing that are remarkable about this correlation. First, the U.S. Dollar has seen a surprising amount of weakness, due in large part to the QE in reverse. This rollback in quantitative easing effectively makes the U.S. Dollar weak by increasing the reserves, inching up interest rates, while lowering the quantity supplied of currency. I suppose this trickling down in the value of the USD will continue until interest rates are raised.

Secondly, with regard to the relationships of the Japanese Yen, the U.S. Dollar, and gold, there's a great amount of interest for the Pacific Rim in general to acquire gold, and the PBOC has done so for their monetary base. The U.S. has shown a great amount of pent up demand for gold in political talks. However, the move against the U.S. Dollar is awful curious, suspecting that, perhaps, large commercial and institutional buyers have been favoring a different base currency, if not exchanged back to the U.S. Dollar, this negative phenomenon becomes a permanently deteriorating factor for the dollar's value. Once again, the initial cause for overhanging weakness should most likely be lifted with any raise in interest rates, as the supply curve shifts upward to meet the call for increased reserves, higher interest rates, etc. This equates to a higher value for the dollar, as is generally understood by the investing public.

But the correlations is also remarkable, because this triangulating factor, so to speak, would have most likely played in between the Dollar, the Euro, and Gold. Now, I am arguing that this relationship exists more presently between the Dollar, Gold, and the Japanese Yen, based on the correlations. Take a look at this scatter plot for 10 years of data, comparing the currency fund $FXE for the Euro, and $GLD for gold:

And, here's a scatter plot between $FXE for the Euro and $GLD, during the same time horizon:
It's fair to say that the daily returns of the Euro ETF (FXE) and GLD are tighter for the last 10 years than the Japanese Yen ETF (FXY) and GLD are.

Now look at a more current depiction of the relationship between daily returns of FXY versus GLD here:
Notice how the daily returns are more correlated for FXY and GLD? There's also a steeper slope, if you draw an imaginary line of best fit, the slope, or beta risk, is much more pronounced, closer to 1.00, or greater; whereas, the previous two scatter plots were near to 0 for the beta.

All in all, this relationship between the Japanese Yen and Gold, is remarkable and could be explaining some of the permanent damage for the USD, where investors and large institutional traders are preferring another asset base for the currency of choice as a risk haven.

Look for the USD to gain back some ground against the Euro, based on sentiment, and look for GLD shares to let off some steam for the weeking ending 1/19.
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