Gold dipped below $1,600 an ounce today, during an otherwise bullish gold market:
Gold futures dropped Friday as upbeat data on U.S. industrial production and New York manufacturing activity helped dull the metal's safe-haven appeal, prompting prices to briefly breach the $1,600-an-ounce support level.
News that George Soros cut his holdings on a major gold fund also added pressure as investors assessed reported comments from the Group of 20 nations, as the group's meeting got under way in Moscow.
This dip came shortly after news was released that Central Banks are buying Gold at a record pace, the most since 1964:
Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes. As far as central bank gold buying, this was the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter. That is up 9% from the fourth quarter of 2011, and the eighth consecutive quarter in which central banks were net purchasers of gold.
The Japanese yen (FXY) is on a path of destruction since a new government announced their policy to weaken the Yen in order to boost their export markets and thus their domestic economy. With only a few down days, USD/JPY is going steadily higher:
But if the yen is going down even against the U.S. dollar, whose value is down against most other currencies, is USD/JPY the best way to trade the currency wars?
The Fed has announced an open policy of US Dollar devaluation, which has sparked interest in a new type of U.S. dollar carry trade, with the U.S. dollar being the borrowing currency.
The reason for the rise in USD/JPY is simply that the JPY is devaluing faster than the USD. The euro is up mostly because of a deterioration in USD value.
So what's the best way to trade the currency wars, and to go long gold?
The simple answer is to be long gold/yen, or XAU/JPY. On a day like today when gold is down, instead of buying the normal XAU/USD which is what most investors would do, the best way to play both the JPY decline and potential rise in gold is to go long XAU and short JPY. It's possible to buy Gold against major currencies now and even some exotics.
To give credit and reinforce the argument of this investment, high profile trader Dennis Gartman recommended doing exactly this trade earlier this year:
It's a good time to buy gold, but not in U.S. dollar terms, Dennis Gartman, editor of The Gartman Letter, said Wednesday.
"It's going higher in yen terms," he said. "You want to own gold in yen terms. I know this tiring to most people, but if you take a look, gold is making a new high in yen terms. Gold in dollar terms is well below its highs."
Buying gold in yen maximizes both sides of the trade:
- Gold rise due to central bank demand as well as a competitive devaluation of all currencies.
- Yen decline due to their stated policy of weakening the Yen, and the actual trend last 6 weeks of Yen going steadily down.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.