Look to the Yen for Commodity Market Direction

by Greg Perlin and Michael Marshall

After peaking at a 27+year high last week, December gold futures have taken a nosedive, falling $30 to near $800 an ounce. We now have to wonder whether this market has topped. Other bullish trending commodity markets are also correcting back as we kick off the new trading week. The question now is: where do commodities markets go from here?

I have been looking for a pullback in gold for some time now, and believe that we are seeing a healthy correction in a market that has run up too far too fast. Though today's selloff currently puts the December gold below the nine-day moving average, a technical sign that the short-term trend has turned negative, I think that we will find some excellent buying opportunities in the metals in the near future.

The signs are there for the savvy trader to read. A lot of market participants have been watching the U.S. dollar as it hit a record low against the euro, and its impact on commodity prices. It might not seem obvious to you, but keep your eyes on another currency—the Japanese yen, which is currently at a 1 1/2-year high against the dollar. CME December yen futures are currently trading around 91.600 and have hit a high of 92.000 so far today. In the recent past, yen futures have shown an inverse correlation to stock index futures. So it concerns me that we are looking at S&P futures up this morning, with the yen remaining strong. I think we are seeing an unwinding of the yen carry trade, and it is taking its toll on a number of the commodity markets today.

The yen carry trade involves selling a currency with a relatively low interest rate (the yen) and using the funds to purchase anything yielding a higher rate of return. A trader using this strategy attempts to capture the difference between the rates. I think people borrowed yen, and bought gold and U.S, stocks, and now we are seeing unwinding taking place. I believe that has contributed in part to the corrections we are seeing in commodities today.

Greg Perlin is a Senior Market Strategist with Lind Plus. He can be reached at 1-800-437-4189 or via email at gperlin@lind-waldock.com.

Michael Marshall can be reached at 1-800-437-4189 or via email at mmarshall@Lind-Waldock.com.

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