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Mini-Metal Monitor: Valentine's Day Party...Or Massacre in the Making?


...the Japanese Yen is now flexing its own "muscle"


Valentine's Day is bringing some morning 'love' to gold bulls as the precious metals trade to the upside.

But, we are wary of a Valentine's Day Massacre scenario developing not just in Gold, but in a host of markets that have come to define investors' love for asset reflation facilitated by overtly loose monetary policy and a global excess of USD liquidity.

We feel that it is not coincidence to note the mini-breakdown in Gold, in line with similar bull market roll-overs taking place in: Emerging Market stock indexes, Japanese Government Bonds, and mostly all global currencies relative to the Yen.

We can identify the means to determine the dominant macro-evolution captivating the global capital markets, by noting two simple market-measuring sticks:

  • Gold relative to all paper currencies …
  • Yen relative to all other paper currencies

Beginning in 1999 and culminating in the 2004 market action, Gold has been commanding a more dominant place among all paper currencies.

However, the Japanese Yen is now flexing its own 'muscle,' and in our opinion this is a worrisome sign from the macro-perspective, in terms of the sustainability of the current bull move in precious metals, and in fact, in all commodities.

We note this is directly linked to the shift in sentiment surrounding the Bank of Japan and their monetary policy, as specifically reflected in the widening of the forward Euro-yen swaps, and the push in the Dec07-Dec06 spread to more than +50 bp.

In fact, the implied Depo swap rates suggest that the Bank of Japan will raise rates by more than either the Fed, or the ECB, during 2007, thus taking the lead in terms of CB tightening. (See our recent Money Monitor focus on Japan.)

We view this development as highly problematic in terms of the sustainability of asset and paper wealth reflation, since Japan is still the world's largest creditor nation and has allowed borrowers access to free funds for years.

An end to this policy could reverberate through the global capital markets in ways not yet imagined.

As per last week's Metal Monitor special report, we are now neutral on the metals, and point to two things for players to watch:

1)The MSCI Emerging Market Stock Index, or EEM, an iShare that has been among the globe's best upside performers.

2)The AUD-JPY cross, which long-time Metal Monitors will recognize as one of our macro-favorites when it comes to gauging the dominant reflation-disinflation influences.

A breakdown in the EEM and the AUD-JPY in tandem with a continued breakdown in the CRB Index would bode quite ill for Gold in the medium-term, and a breakdown in all three is exactly what we are seeing.

Observe Monday's mini-breakdown in the EEM, as seen in the chart below. An extension of this seemingly sudden sell-off below the key near-term technical levels, highlighted in the chart, would help solidify our macro-thought-process.

We are neutral on gold, and we are making sure not to wander into any seemingly vacant garages, for fear of becoming a casualty in a Valentine's Day Massacre. Not that the shooting will start today, but we are taking no chances within the context of the current market evolution.

This letter is an excerpt of "The Metal Monitor", and has been reproduced with the full authorization of its publisher. For information about subscribing to macro-market research services, including "The Metal Monitor", e-mail:

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