How Will the Yen Intervention Affect Precious Metals?

The relationship between the US dollar index and precious metals is an important one to respect.  Last week, the dollar index experienced a sharp decline as the EU plan offered support to the euro, which is the largest weighted currency in the dollar index basket.  As a result, gold and silver had a terrific week.  Now, the Japanese yen is sending the US dollar sharply higher, and precious metals lower.

The Japanese yen is the second largest component of the US dollar index.  Early Monday, the Japanese government sold the yen for the second time since August after hitting another post-World War-II record high against the dollar.  A currency intervention is often considered a way to boost exports.  “We started currency intervention this morning in order to take every measure against speculative and disorderly moves and to prevent risks to the Japanese economy from materializing,” Prime Minister Yoshihiko Noda told parliament.  The intervention came after the dollar reached a low of 75.31 yen, and the intervention sent the dollar surging to 79.53 yen.  The Bank of Japan confirmed the intervention, but did not comment on the size of the action.  “It’s been massive, really, that’s the only word to describe it,” said Michael Turner, strategist at RBC Capital Markets.  “From what we gather, it’s larger than their most recent intervention.”

On Friday, gold futures for December delivery closed at $1,747.20 per ounce, while silver futures settled at $35.29.  We have been warning our premium subscribers that the dollar index broke a critical support level, and was due for a pullback into the 73-76 range.  Last week’s strong decline in the dollar index confirmed this, and gave gold and silver the strength to break out of their respective trading ranges.  As the charts below show, gold broke through $1,700, while silver broke through $34.

On Monday morning, the large Japanese yen intervention move sent the dollar surging higher and dollar denominated assets lower.  Gold reached as low as $1,705, while silver fell to $34.09 in morning trading.  “Gold and other precious metals are being knocked this morning by profit-taking and the strong US dollar,” said analysts at Commerzbank.

Going forward, many believe that this is not the end of the road for gold and silver.  “After a short period of consolidation in gold, I believe it will continue upward progression,” said Jeff Wright, managing director at Global Hunter Securities. “We are comfortable with gold rising back to $1,800–$1,900 level in early 2012 with a spike above $2,000 in the first half of 2012.”  The US still faces problems of its own.  The Congressional Super Committee, a bipartisan committee, is fast approaching its November 23 deadline to find $1.5 trillion in deficit cuts.  According to bond strategists at CRT Capital Group, 38.5% of survey respondents believe a failure to reach a deal by the Super Committee would lead to another downgrade of US credit by the end of the year.  As we discussed in a previous article, the last US credit downgrade sent gold surging 13% in about two weeks, while silver gained 10%.

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