Want to know about direction on gold? Look at Treasuries

When geopolitical events take a nosedive, you will often hear about the “demand for safe havens” rising. As a general rule this will mean that people are talking about assets such as US Treasuries, Gold and the forex safe port in a storm, the Japanese Yen. But how much truth is there to this rule? Well if you look at the charts, certainly in 2015, the prices have been very well correlated.

gold yen

The following charts all show that over the past few months, anyone that was profiting from trades on gold could have also traded the yen and US Treasuries (here taken as the 10 year yield) and also profited. Look at the chart below which shows Gold and an inverted calculation of the forex pair of Dollar/Yen (USD/JPY needs to be inverted as a stroger yen pulls the pair lower, whilst a stronger gold obviously pulls gold higher).

Since the end of last year the two have become increasingly well correlated. Measuring correlation over the course of a trading month, the two instruments have had a correlation of over +0.5 for most of this year, and in recent weeks the correlation has been getting stronger. This would suggest that when the gold price is trading in one direction, the yen will trade in the same direction. The lines are clearly not exact and this may mean slight day to day differences, however over a period of time the correlation is strong.

gold jpy

The relationship also rings true of the Japanese yen versus the US 10 year Treasury Yield. This time both are calculated as they are (ie. no need to be inverted). The only thing to remember is that a positive yen pulls USD/JPY lower, whilst buying the US 10 year Treasury would also pull the yield lower.

Once more we see the strong positive correlation between the yen and US Treasuries. Again, since January the one month correlation has been well over +0.5, with the only real dip coming in mid March.

10 y yen

I believe that these charts show that if you can call the direction of the safe haven flows and there are trading signals on one instrument, then it might be worth looking at the others. If Gold is giving a near to medium term buy signal, the strong correlations with the yen and US Treasuries suggest a read through across the safe haven plays.

There are many ways that the positive correlations between the safe havens can be played. Another idea could be that if gold is beginning to outperform the yen (as seems to be the case currently according to a chart of the relative performances of both gold and the yen against the Dollar Index), then perhaps there is a hedge that can be traded. That would mean buying gold and buying Dollar/Yen (which is effectively selling the yen).

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