Dollar/Yen Ratio Says Gold Bottom Is Near

Summary

• Dollar strength, yen and euro weakness still weighing on the gold price.

• Dollar/yen ratio suggests a short-term bottom for gold is near, however.

• Don't expect gold bottom until dollar index breaks its 15-day trend line.

One of the most important areas to watch for signs of an approaching gold bottom is the currency market. Specifically, the relationship between the U.S. dollar, the yen, and the euro will provide important clues as to what gold traders should expect for the metal in the short term. In today’s report, we’ll examine these currencies - and look at an important currency ratio - as we continue to wait for an immediate-term bottom in the gold market.

Gold was flat after sliding to a fresh 2018 low on Thursday and despite another rise in U.S. bond yields and a strong dollar. Gold has fallen more than 2 percent this week due to gains made by the dollar and a rise in the 10-year Treasury note yield. Spot gold was flat at $1,290 while June gold futures settled lower by $2.10, or 0.2 percent, at $1,289 in the latest session.

Providing some much-needed short-term support for gold right now is lingering geopolitical concerns over North Korea. As mentioned in Thursday’s report, North Korea called off high-level talks with South Korea, blaming U.S.-South Korean military exercises. North Korea also threatened it might not attend a scheduled June 12 summit with the U.S. if Washington continues to insist that it unilaterally surrender its nuclear weapons.

Nevertheless, the yellow metal has been continually stymied in its attempts at rising from a strengthening dollar. The U.S. dollar index has climbed nearly 4 percent in the second quarter to date, partly on expectations that the Federal Reserve will lift interest rates further this year at a time when other central banks are keeping rates low.

Gold isn’t alone in suffering the effects of a stronger dollar. The euro and the Japanese yen currencies have also been extremely weak recently during the dollar’s rise in value. Shown here is the Japanese yen ETF, the CurrencyShares Japanese Yen Trust (FXY), which reflects the yen’s value. A falling yen is typically a sign that investors have shed their aversion to risk assets and are less interested in safety. This of course normally bodes ill for gold, as has certainly been the case of late. Ideally, we should see FXY strengthen to let us know that risk-aversion is increasing, which in turn would strengthen the outlook for stronger gold demand.

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