Gold 'out of sync' with VIX, Takes Lead from USD/JPY

Gold 'out of sync' with VIX, Takes Lead from USD/JPY

9 May 2016, 03:30
Roberto Jacobs

Gold 'out of sync' with VIX, Takes Lead from USD/JPY

One of the most striking features of the 2016 Gold rally is the decoupling with the VIX from a macro-level perspective, especially during mid-February.

Gold, VIX going in different ways

For the last 3 months, while the VIX has come drastically off highs, Gold has continued to make new uptrend highs, after a lengthy 2-month+ consolidation period. The major divergence between both instruments provides two interpretations.

Firstly, the clearest one is that Gold has managed to find renewed buying interest on broad-based USD weakness as the Fed seems unwilling to raise rates further. Secondly, even on a lower USD, the inability of gold bears to take gold off elevated levels, following the plummeting of the VIX index is the last 3 months, communicates that any downward pressure in the yellow metal emanating from an 'improved sentiment', has served the purpose of not only taking profits but of also accumulating new positions for a fresh buying-campaign, with so far a successful outcome to test the $1,300.00 area.

USD/JPY main driver of Gold

What the decoupling of Gold vs the VIX in the last trimester means is that other assets have taken the front seat driving the yellow metal, and none other than USD/JPY to explain the relentless bid in Gold, with the current correlation coefficient standing at -0.83, the strongest it's been since late February this year. Note, the latest spike in Gold off $1,250.00 towards $1,300 had its catalyst on the April 28th BOJ monetary policy decision, which was kept unchanged.

At this stage, since the extremely tight correlation between USD/JPY and Gold is evident, Gold traders should keep a close look at USD/JPY performance in order to gauge the next potential direction for Gold prices. Should the risk-on sentiment improve, given the obvious divergence observed in US-Japan yield spread, which supports a USD/JPY recovery, watch also for sellers to be lurking in the yellow metal in any signs of USD/JPY appreciation.


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